JP Morgan expects the country’s inflation rate to remain benign, noting the distinct absence of demand-side pressures that could aggravate worries over rising oil prices.
The strength of the country’s balance of payments position, according to JP Morgan, would continue to support the strong peso and this would mitigate the impact of oil prices on the consumer price index.
JP Morgan economist Sin Beng Ong said over the weekend that the inflation rate this year has remained low due to the rapid appreciation of the peso.
“There has been no second-order pressure on inflation outside of the energy sector because demand is not there,” Ong said. “That could mean the central bank could continue cutting its rates.”
The Bangko Sentral ng Pilipinas (BSP) last week cut its policy rates by 25 basis points, bringing its overnight borrowing rate to a new 16-year low of 5.5 percent and its overnight lending rate down to 7.5 percent.
The BSP’s decision stemmed mainly from the broadly benign inflation outlook as the national average inflation rate settled at 2.6 percent for the first 10 months of the year, hitting the low end of its projected 2.5 to three percent inflation rate for the whole year.
According to Ong, the rise in commodity prices was muted by the strength of the peso and this is not likely to change even in 2008 considering the country’s strong BOP position.
Reversing the $95-million deficit in September, the country’s BOP position swang back into a $1.19-billion surplus in October, bringing the 10-month surplus to a new historic high of $7.849 billion.
According to the BSP, the October monthly surplus was the third highest this year after hitting $2.212 billion in August and $1.343 billion in July.
The BSP said it expected the full-year BOP surplus to reach over $7 billion by yearend, with the gross international reserves (GIR) reaching $32 billion.
Already anticipating the strength of the peso as a result of strong BOP surplus, the BSP has revised its inflation target for 2008 to three-to-five percent from the original target of four-to-five percent.
The 2008 target was actually placed at four percent, plus or minus one percentage point, reflecting a shift in the expression of the target that effectively widened the range.
Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. said the inflation outlook of the BSP remains benign even with price of oil edging closer to $100 per barrel in the world market.
According to Tetangco, this is partly due to the strength of the peso against the dollar, the weakness of the dollar itself and the broad stability in domestic food supply.