Low Inflation Reflects Stability
The inflation rate moderated to 0.8 percent in October 2019, the slowest in three-and-a-half years, reflecting the Duterte administration’s strong political will to stabilize the economy and make it more conducive to both investors and consumers.
The inflation in October, according to the Philippine Statistics Authority, softened from 0.9 percent in September and 6.7 percent in October 2018. It was also the slowest since April 2016 when inflation settled at 0.7 percent.
With the latest number, the inflation rate in the first 10 months averaged 2.6 percent, or within the government’s 2019 target range of 2 percent to 4 percent.
The inflation rate fell below 1 percent for two consecutive months starting September mainly because of the high base effect and the decline in the actual price of rice following the extraordinary surge last year caused by an artificial supply shortage.
The government showed it is in control of the situation by implementing the rice tariffication regime, which effectively abolished the monopoly on rice imports by the National Food Authority.
As a result, we registered a 0.9-percent deflation or negative growth in prices of food and non-alcoholic beverages in October, a sharp reversal from the 9.4-percent food inflation recorded in the same month last year. For the poor Filipinos, food inflation is the most important number in the consumer price index.
The transportation segment of the CPI also registered a deflation (-1.7 percent) in October because of subdued petroleum prices. The food and transport components represent 46 percent of the CPI basket and directly affect the low-income groups.
Data show that following the rice tariffication, the price of rice declined for the sixth consecutive month. In October, the price of the staple was 9.7 percent lower year-on-year, according to the PSA.
I believe that inflation most likely bottomed out in October, as prices were normally expected to pick up a bit in November and December because of holiday spending.
Still, a radical increase in prices of basic commodities is not expected, except for pork products amid the African swine fever, or ASF, scare that affected the hog industry in Rizal, Pangasinan, Bulacan, Nueva Ecija, Pampanga, Cavite and Quezon City.
Overall, I believe the domestic economic environment has become more conducive in the fourth quarter because of the low inflation rate, with the strong peso and the resurgent stock market.
The peso appreciated by around 4 percent this year to trade at 50.50 against the US dollar, making it one of the best-performing Asian currencies, while the Philippine Stock Exchange index recently breached the 8,000-point mark.
Given the downtrend in the inflation rate, the Bangko Sentral ng Pilipinas has more flexibility to further adjust the interest rates so that companies and households will have more spending capability. I know that some companies are just waiting for interest rates to return to the record-low level of 3 percent before embarking on their next wave of expansion.
The overnight borrowing rate stands at 4 percent after the Bangko Sentral reduced it by a total of 75 basis points this year from a high of 4.75 percent in 2018. The Monetary Board, in the face of rice-induced inflation, moved last year to increase the benchmark rate by a total of 175 basis points from a low of 3 percent in 2017.
With the threat of the rice-price surge becoming a thing of the past, I believe it is time for the BSP to be more supportive of economic growth, resume monetary easing and bring back the rate to 3 percent to help companies and households avail themselves of financing, which is the lifeblood of the economy.
Both the BSP and the National Economic and Development Authority expect inflation to remain within the target range of 2 percent to 4 percent from 2019 to 2021 given the current macroeconomic fundamentals.
BSP Governor Benjamin Diokno has in fact clearly conveyed to the market his preference to support economic growth by releasing more liquidity. Apart from slashing the key interest rates, he led the Monetary Board in reducing the reserve requirement ratio of banks by a total of 400 basis points this year to 14 percent in line with his goal to reduce the RRR to a single-digit level by the end of his term in 2023. This unleashed around P400 billion to the market, but banks mainly used them to invest in government securities.
We hope the banks will follow the signal from the BSP to be more supportive of the economy by directly lending to investors and consumers.
With inflation rate settling below 1 percent and GDP resuming its 6-percent plus growth pace, BSP, without losing its price stability objective, is in the best position to provide an environment conducive for faster growth in the second half and in 2020.