MANILA, Philippines — Despite the brief spike in oil prices, the Bangko Sentral ng Pilipinas (BSP) can still be expected to slash policy rates in its meeting this week as the downtrend in inflation is expected to be sustained, said London-based Capital Economics.
In a research brief issued over the weekend, the macroeconomy research firm said following the Saudi government’s announcement last week that it can normalize supply within the month, fuel price inflation in the Philippines is expected to remain muted.
“The governor of the Philippines central bank (BSP, Benjamin Diokno, has hinted strongly in the past couple of weeks that the central bank will cut interest rates, and we have penciled in another cut,” said Capital Economics.
“The main reason the central bank in cutting interest rates is the sharp recent drop in inflation…The recent spike in oil prices due to attacks on Saudi production has mostly unwound and Brent crude is now down at $65 per barrel, which is lower than its level of a year ago and is consistent with fuel price inflation in the Philippines continuing to fall,” it added.
Growth in consumer prices decelerated further to 1.7 percent in August and is expected to fall further in the coming months as food prices also continue to ease.
On Thursday, Socioeconomic Planning Secretary Ernesto Pernia said the recent supply disruption caused by the attacks in Saudi Arabia’s oil industry is no longer expected to exert inflationary pressure after the Middle East oil giant announced that it can normalize oil production within the month.
“Saudi has said they will be back in full business by the end of September, so it’s short-lived,” he said.
Because of this, Pernia said there is no need to review inflation and growth targets for the year.
“Not unless something like this is prolonged,” he said.
The government expects the growth in consumer prices to average at a range of between two up to four percent this year and growth to average between six up to seven percent this year.
Saudi Arabia announced on Wednesday it could restore lost oil production by the end of September following drone attacks on state-owned Aramco’s plants in Abqaiq and Khurais.
The Middle East oil giant also announced it has managed to restore supplies to customers at the same levels before the attacks by drawing from its abundant oil inventories.
As inflation is expected to be stable and government spending picks up, growth in the third quarter can still be expected to be faster than the second quarter of the year, said Pernia.
Despite this optimism, Capital Economics said the economy still needs stimulus as any rebound will still be slow.
“Meanwhile, the economy could do with further support. Growth reached a four-year low of 5.5 percent in the in the second quarter, and while it should rise as government spending picks back up, the recovery is likely to be slow going,” it said.
Capital Economics said a cut in reserve requirement ratio (RRR) for banks was “also likely sometime over the next few weeks.”
“We do expect the bank to announce another series of downward adjustments (in RRR) in Q4, probably in October,” it said.