Inflation expected to slow to just 1.5% in second half

With global oil prices on the downtrend, London-based Capital Economics said the Philippines should expect the rate of increase in prices of basic commodities to average only 1.5 percent during the second half of the year.

“We think inflation will begin to fall more rapidly in the months ahead. For one thing, transport price inflation is likely to fall further on the back of lower fuel prices,” Capital Economics Asia economist Alex Holmes said in a July 5 report titled “Renewed drop in inflation to continue.”

He said they expected Brent crude to hit just $60 per barrel by the end of the year. But even with a slight rise, it should not match the high prices seen last year.

In June, transport inflation eased to 1.6 percent year-on-year from 3.5 percent in May. Capital Economics said it was “the largest driver of the drop” in headline inflation to a 22-month low of 2.7 percent that month.

“Meanwhile, the fall in food price inflation has further to run. The liberalization of rice imports has kept downward pressure on rice prices. And as the surge in prices in the second half of last year enters the annual comparison, year-on-year inflation is set to tumble,” Holmes added.

Food inflation in June declined to 2.7 percent from May’s 3.4 percent as prices of the heavily weighted rice dropped 1.7 percent year-on-year.

“Inflation in the majority of subcategories of the CPI [consumer price index] fell last month, suggesting a broad-based easing in price pressures,” Holmes added.

As such, he said Capital Economics expected headline inflation “to average just 1.5 percent year-on-year over the second half of 2019, below the central bank’s 2-4 percent target range.”

In the first half, the inflation rate averaged 3.4 percent.

Moving forward, easing inflation was seen by Capital Economics as a “green light for the BSP [Bangko Sentral ng Pilipinas] to make another cut to its policy rate.”

“A cut is likely at the [BSP’s] next meeting in August. And with inflation set to fall further, we expect more easing thereafter, taking the policy rate from 4.5 percent now to 3.75 percent by early 2020,” he said.

In June, the BSP’s policy-setting Monetary Board kept key interest rates steady to ensure that the slight inflation uptick to 3.2 percent year-on-year in May would not be aggravated by the additional liquidity being injected into the system by the three-phased cut in all banks’ reserve requirement ratio. —BEN O. DE VERA