Inflation seen falling below 6% in Dec

MANILA, Philippines — Nomura Securities Ltd. sees December inflation falling below six percent for the first time in four months, giving the Bangko Sentral ng Pilipinas (BSP) more room to finally keep interest rates steady.

In a research note titled “Philippines: Inflation has not only peaked but is falling more sharply,” Nomura economist Euben Paracuelles said the company has lowered its inflation forecasts to 5.2 percent instead of 5.4 percent this year and  3.7 percent instead of 4.4 percent next year.

“Headline inflation could continue to fall fairly sharply in the coming months, as adjustments to energy-related components become more complete,” he said.

He pointed out the transport component does not yet appear to fully reflect the recent drop in retail fuel prices, while the transport fare hikes in late October, which likely provided some offset, have already been rolled back.

Paracuelles said inflation would fall further to around 5.5 to 5.7 percent in December, on an assumption that oil prices would remain at current levels for the rest of the year and the decline in rice prices would likely continue over the near term.

Inflation averaged 5.2 percent from January to November, exceeding the two to four percent target set by the BSP for 2018 to 2020. The consumer price index eased for the first time to a four-month low of six percent in November from a near-decade high of 6.7 percent in October.

The BSP’s Monetary Board raised interest rates by 175 basis points in five straight rate-setting meetings this year to rein in inflationary pressures. It jacked up rates by 25 basis points for the first time in three years last May 10 followed by another 25 basis points last June 27, 50 basis points last Aug.9, 50 basis points last Sept. 27, and 25 basis points last Nov. 15.

The next rate-setting meeting of the central bank is scheduled on Dec. 13.

With the lower inflation forecasts for 2018 and 2019, Paracuelles said Nomura no longer expects rate hikes from the BSP.

“Consequently, given that – unlike other regional central banks – monetary policy is firmly tied to the inflation outlook, we now expect BSP to leave policy rates unchanged at 4.75 percent through 2019 and 2020,” he added.

Nomura previously expected another 75-basis point rate hikes by the second quarter of 2019.

He said the trajectory of Nomura’s new forecasts suggests headline inflation would fall sharply throughout 2019 and reach the lower end of BSP’s two to four percent target by the fourth quarter.

“With headline inflation falling more sharply, we think inflation expectations will also start to adjust lower in the coming months, given they tend to form adaptively. This, in our view, has been and will remain a main consideration for BSP: given inflation expectations are highly elevated, we see room for a significant downtrend before settling within the two to four percent target, providing BSP with some room to maintain policy settings,” he said.

Paraculles said the drop in oil prices and the likely passage of the “rice tariffication bill” before year-end are the main drivers of the forecast change, although the favorable base effects that would kick in at the start of the year will also have an impact.