Below 1% inflation possible in Q4 – ING

MANILA, Philippines –  Dutch financial giant ING Bank sees average inflation falling below 1.4 percent this year on the back of stable food prices and cheaper utility rates before picking up to 2.2 percent next year due to the impact of the severe and prolonged El Niño weather condition.

Joey Cuyegkeng, senior economist at ING Bank Manila, said inflation is likely to average 0.8 percent in the fourth quarter of the year, giving the Bangko Sentral ng Pilipinas (BSP) more space to keep interest rates steady.

“We expect fourth quarter inflation to average around 0.8 percent resulting to a 2015 average inflation rate of less than 1.4 percent,” he said.

Inflation eased to a new record low of 0.4 percent in September from 0.6 percent in August bringing the average inflation to 1.6 percent in the first nine months of the year due to stable food prices and lower power rates.

He pointed out inflation pressures remain low as the effect of El Niño on prices would likely be felt in 2016.

“Demand pressures could exacerbate the impact of the dry spell on prices of basic goods. We currently expect 2.2 percent 2016 average inflation rate,” he added.

According to Cuyegkeng, the government’s mitigating measures including additional rice imports, would moderate price pressures.

On the other hand, he said oil inflation would continue to exert downward pressure on headline inflation until the first quarter or second quarter next year. 

With a prolonged dry spell, Cuyegkeng explained food inflation would likely head higher in the first half of next year while power and other utility rates are also expected to rise next year.

He pointed out the country’s monetary policy remains focused on upside risks.

Aside from El Niño related price pressures, he said financial market volatility as it impacts the financing performance of the financial sector is another source of risk.

“Excessive and prolonged financial market volatility could affect the banking sector’s disposition to finance economic activity. Strong capitalization of banks could moderate the impact of such volatility but may not be enough if the financial sector volatility results to a less favorable asset quality of banks,” he said.

However, he explained macroprudential measures have been put in place to guard against such developments while stabilizing the financial sector through targeted intervention would also help.

He said strong domestic demand would push the country’s gross domestic product (GDP) growth close to six percent this year and above six percent next year.

The country’s GDP growth slowed to 5.3 percent in the first half of the year from 6.4 percent in the same period last year due to weak global demand and lack of government spending.

“In the meantime, the current policy settings remain appropriate and are a stabilizing factor for financial markets,” Cuyegkeng said.

The BSP’s Monetary Board has kept interest rates steady since October last year after raising key policy rates by 50 basis points last year. The overnight borrowing rate is currently pegged at four percent while the overnight lending rate is at six percent.