The Bangko Sentral ng Pilipinas (BSP) was seen keeping inflation not lower than 2 percent this year to avoid a scenario in which prices consistently fall, discouraging consumption and investment activities as direct consequences.
Analysts at Standard Chartered Bank said the BSP will only consider cutting back the rate at which it borrows from or lends to bank should the rate of change in prices, more known as inflation, fall below 2 percent over the next few months.
The analysts, however, quickly said such an event was not likely to happen in February.
The state of disinflation is something central banks fear, because any persistent drop in prices
discourages consumption activities as consumers look head to more price drops down the line.
Businesses also tend to abort expansion plans in similar anticipation of potentially lower cost of money down the line. As businesses and households each hold back on expansion plans and consumption activities, local output growth, measured as the gross domestic product, suffers.
In a research note looking forward to the weeks ahead, SCB economist for the Philippines Jeff Ng said an analysis on latest data show a “higher possibility” of rate cuts by the central bank this year should inflation stay below the government’s target for the year.
The central bank previously projected inflation ranging lower this year to 2 percent up to 4 percent compared to last year’s 3 percent to 5 percent. The SCB analyst said inflation was likely to remain benign in February as prices continue to drop.
According to an SCB analysis, forecast inflation should remain unchanged in February.
In particular, forecast inflation in February will likely hit 2.4 percent, or within the central bank governor’s forecast for the month ranging from 2.2 percent to 3 percent.
“Energy inflation likely continued to drop due to lower crude oil prices. Electricity prices fell 11.3 percent year on year in January and have been on a steady downward trend since the 5.4-percent increase in October 2014,” Ng said.
“Similarly, prices of fuels and lubricants fell 13.1 percent year on year, following a 0.2-percent increase in October 2014,” the analyst quickly added.
“Meanwhile, food inflation has remained above the levels seen in 2012 and 2013,” the analyst further said.
Other economists have said the BSP was likely to follow other central banks in the region in cutting interest rates as some have actually done already due to unusually low inflation in their jurisdictions. The latest was the People’s Bank of China which lowered its one-year deposit rate by 25 basis points.
At its last rate setting meeting, the BSP kept the key rates unchanged at 6 percent for lending and 4 percent for borrowing or the reverse repurchase rate.
Earlier, the central bank governor said the country’s inflation was not likely to fall below zero and that the BSP remains confident of within-target inflation for the year.
Tetangco said on February 20 that “the risk of inflation falling below zero or to negative levels in the Philippines appears to be minimal,” the SCB analyst noted. The Philippines will release the February inflation data on March 5.
(With a report by Genivi Factao)