Exuberant

You know how that adage goes: if it looks too good to be true, it probably isn’t.

The inflation reading for the last month brought the rate down to 1.9 percent. That is very good news. It is about a point lower than estimated. That is significant.

One cannot blame our monetary authorities for their exuberance. Some are claiming we have beaten the inflationary scourge.

True, the slowing inflation rate was, to a major extent, the result of tough interest rate policies. Even after other countries cut their rates, we continued holding on to ours.

The argument can be made that, by bringing down the rates too late in the curve, we might have unduly given up opportunities to expand our economic expansion more quickly.

The high interest rate regime conservatively maintained beyond the period of necessity may be compared to running our car with the hand brakes on. That stresses out the engine.

Before cutting interest rates, our monetary authorities first reduced the reserve requirement imposed on banks. The high reserve requirement kept banks from lending far more than they actually did. Lending less than they possibly could, the high reserve requirement prevented more robust bank earnings.

At any rate, the banks now have a lot more pesos to lend. In a while, we should know if borrowers respond strongly. The comparatively higher interest rate prevailing could serve to rein in the appetite to borrow more to invest. But we are promised more heftier interest rate cuts over the coming weeks and months.

Beyond monetary policy, the lower inflation rate registered reflects a convergence of beneficial factors. These factors may not be recurrent.

The biggest factor is the relatively cheaper fuel prices we have been enjoying through September. Slower economic expansion in China and in several major economies tempered demand for oil. Despite OPEC’s efforts to cut production levels, supply of the vital commodity in the global market remains ample.

Oil will not be as cheap in the coming months. The possibility of a wider conflict in the Middle East caused oil prices to spike back up again.

Should Israel decide to bomb Iran’s oil processing facilities in retaliation for last week’s missile attacks on the Jewish state, the shock waves in the global market could be severe.

Those shock waves could become even more severe if, as a response to the expected Israeli bombardment, Tehran orders its client militia in Yemen to attack Saudi oil processing facilities. They have done this before. They could attempt the folly again.

Riyadh and the Gulf States have signaled Tehran they will remain on the sidelines, not taking sides in the escalating conflict between Israel and Iran. This may be read as an attempt to keep their oil safe from bombardment.

A second item influencing the lower inflation rate is the slight drop in rice prices. This is a response to government policy lowering the tariff rate on our rice imports. The basic disability of our agriculture to produce enough rice to meet our needs remains, however. Our status as the world’s biggest rice importer stands.

Beyond this point, rice prices are not expected to be significantly lower. With our higher cost of production due to small farm inefficiencies, a much lower rice price regime will impoverish our farmers.

Too, it must be mentioned that agri losses due to our bout with El Niño have not been unduly severe. Our losses are par for the course, so to speak, sitting as the country does on the path of typhoons.

As the cruel cycle goes, we are moving on to a La Niña episode. Flooding, instead of drought, will be the menace our farms will deal with.

It will help moderate inflation if the peso holds on to its exchange value. But this is more a function of the dollar’s strength rather than the peso’s weakness. Therefore, it is a dynamic beyond our policy control. The prolonged retention of the high interest rate regime did help keep the peso’s value relatively stable.

The lower inflation rate registered for September is also caused by the base-effect of higher than expected inflation rates in the preceding period. October inflation will be calculated using the September base. Therefore, this will likely bring us a higher number.

Hopefully, the threat from ASF subsides. That will encourage more domestic pork production to meet the seasonally higher demand during the Christmas season.

Lower oil prices through September did keep our energy costs in check. But if oil prices spike, our power costs will be higher in the coming months. One can almost hear the groaning of our consumers.

The forecast is that the Philippine economy will hit its expansion target of six percent this year. A slightly higher forecast for 2025 is being maintained. This will make us the fastest growing economy in our region. This does not say much, however, considering we are launching from a lower base.

Still, the growth we expect will be double the growth rate of the global economy. This should make life a little easier for our people.

The slower average growth rate of the global economy is a factor that will hold back our own capacity for expansion. Again, this is a factor we cannot wish away.

Any major disruption in the global economy will make our growth prospects a bit more tenuous. The Middle East remains the wild card.