Inflation seen easing next year despite El Niño

MANILA, Philippines - Dutch financial giant ING Bank sees Philippine inflation falling below the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP) for 2016 despite the impact of the prolonged and severe El Niño weather condition.

Joey Cuyegkeng, senior economist at ING Bank Manila, said inflation is seen accelerating toward the end of next year and averaging 1.6 percent in 2016.

“Inflation by yearend 2016 is expected to rise to around 2.5 percent, in our view, and to average at 1.6 percent,” he said.

Latest data from the Philippine Statistics Authority (PSA) showed inflation kicked up to 1.1 percent in November from a record low of 0.4 percent in October due to a sharp increase in food prices.

Inflation averaged 1.4 percent in the first 11 months from 4.3 percent in the same period last year. This was lower than the BSP inflation target of between two and four percent this year.

The rise in the consumer price index was primarily due to the higher annual rate in the heavily-weighted food and non-alcoholic beverages index as it advanced 1.7 percent from a previous month’s growth of 0.7 percent.

The BSP has further lowered its inflation forecast to 1.4 percent instead of the previous projection of 1.6 percent for this year because of the continuing softening of oil prices as well as other food prices.

Likewise, inflation forecast for 2016 was reduced to 2.3 percent instead of 2.6 percent and for 2017 to 2.9 percent instead of three percent amid the continued decline in oil and other commodity prices as well as an economic growth fueled by continued consumer spending.

“BSP expects average inflation of 2.3 percent in 2016 which could mean that headline inflation by year-end 2016 could be around three percent,” Cuyegkeng said.

Earlier, BSP Governor Amando Tetangco Jr. said monetary authorities would monitor external developments as inflation bottomed out in September and October with credit and domestic liquidity growth rates also stabilizing.

“These signal that our stance of policy right now is appropriate,” he said.

The BSP is set to hold its last policy-setting meeting for the year on Dec. 17.

Tetangco said the BSP would continue to monitor development particularly actions of advanced economies including the decision of the US Federal Open Market Committee next week as well as the European Central Bank (ECB).

On the other hand, Cuyegkeng said the peso is expected to end the year at around P46.8 to $1 on the back of strong remittances from overseas Filipinos and the interest rate increase in the US.

“We expect peso to end the year at around 46.80 on a dovish guidance from the US FOMC next week and inflows from overseas Filipino workers. However, technicals point to a possible breach of the resistance level heading towards 47.50,” he said.

According to Tetangco, the 47.20 to $1 has been a strong barrier and the movement of the local currency would depend on the normalization of interest rates in the US as well as the country’s gross domestic product (GDP) growth and interest rates.