By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr. said monetary policy stance next month could move depending on the data that will support it, namely the July inflation, the second quarter GDP growth and the US Federal Open Market Committee action or non-action in two weeks.
But generally, Dakila said the inflation path, which fell to an average rate of three percent in the second quarter from 3.8 percent in the previous quarter, seems to be on track of further sliding to below the two-percent level by the third quarter since its direction continue to be on a downward trajectory.
“We’ve always emphasized that inflation targeting is a data-intensive framework and we’ll be looking at all the relevant data come the August meeting of the Board,” said Dakila during the press briefing on the second quarter inflation data on Friday.
Dakila said that in reviewing the next policy stance and inflation projection, the Monetary Board will be looking at several data points that will “have a big impact on the assessment of the inflation outlook including what will be happening to the July inflation, and whether the inflation trajectory is going down as fast as we’ve been projecting.”
“Also, I note that the release of the second quarter GDP will coincide with the Board’s forecast at (its) monetary policy meeting. Those are key data points. There are also several key factors that will be happening on the external side including what happens to the Fed (US Federal Reserve) decision to a great extent that the impact of the expectations pertaining to that decision has already been felt in financial markets,” he said.
Dakila said these are the data the Monetary Board will be looking at in “assessing what to do in its next policy meeting” which will be on August 8.
BSP Department of Economic Research Director Dennis D. Lapid said that after the June 20 Monetary Board policy meeting – when the decision was to pause after cutting interest rates by 25 basis points last May 9 – they continue to assess an easing inflation number.
“We’re looking at an increasingly favorable (inflation) outlook for 2019 and 2020,” said Lapid, adding that the market’s inflation expectations “have started to moderate … it’s well-behaved” while domestic demand also continues to be firm. He also said that with the favorable inflation outlook, the BSP has more “opportunity or space to consider output demand or conditions …”
The decline of the inflation average to three percent in the second quarter is much more significant when compared to five percent same time in 2018.
Lapid said the lower inflation is brought about by reduced prices of rice and corn which mostly make up the food inflation while non-food inflation are also slowing with lower utility prices, lower health-related services, and lower costs of education because of free tuition.
These were the main factors why inflation rate was reduced from 3.8 percent in the first quarter to three percent by end-June average, because of improved domestic food supply conditions which significantly reduced food inflation. Prices of rice with the harvest season and rice imports have gone down, while the lower food prices in turn offset the impact of higher fuel prices.
“These developments brought the year to date inflation to 3.4 percent which is well within the government’s announced target range (of two-four percent).
Similarly, the official core inflation rate slowed down to 3.4 percent year-on-year in the second quarter of 2019 from 3.9 percent in the first quarter suggesting a continued easing in demand side price pressures,” said Dakila, reading the statement of BSP Governor Benjamin E. Diokno who was in Davao.
Lapid said that since inflation has a demand side and supply side, with core inflation as the demand side – “(we also) see demand pressures seem to be easing (to) 3.4 percent for the second quarter. (And) as headline inflation has steadily gone down, the inflation expectations also eased and well-behaved.”
The BSP’s latest inflation forecasts as of June 20 was 2.7 percent for 2019 and three percent for 2020, both lower than May 9’s 2.9 percent for this year and 3.1 percent for 2020 projections.