By Bianca Cuaresma & Cai U. Ordinario
The Bangko Sentral ng Pilipinas (BSP) would not likely be stampeded into relaxing its grip over the policy rates just yet, no matter the confirmation of still lower inflation in June, when the rate of change in prices hit a 20-year low of 1.2 percent.
BSP Governor Amando M. Tetangco Jr. hinted strongly against an interest-rate adjustment at this point on Tuesday, saying that the record-low inflation for the month should be viewed with caution.
“While this outturn is at the low end of the target range, there remain upside risks of financial-market volatility in reaction to developments in Greece and possibility of the El Niño later this year that necessitate care in next moves,” Tetangco said.
The financial and political turmoil generated by Greek officials and their obstinate refusal to be cowed by the collective demands of their creditors, which include the International Monetary Fund, the European Central Bank and the 19-nation currency union under the European Commission, has unsettled markets.
But, in the Philippines, regulators have their interest set not just on the volatilities that the Greek slide into financial instability and the feared contagion these represent, but also on the more parochial issue of weather disruptions represented by the El Niño on food supply, for instance.
Bank of the Philippine Islands research officer Nicholas Antonio Mapa said what Tetangco meant by the shift in tone was not a reduction in interest rates due to low inflation, but retaining them for when inflation starts to rise due to the spillover impact of developments in the 19-nation European Union, the El Niño and even the so-called statistical base effects when this also starts to wane.
“Tetangco has been known to communicate effectively to markets, helping telegraph moves to guide market sentiment. He would be very wary to give away statements about upward pressure on inflation due to El Niño and financial-market volatility if he did not have a preference,” Mapa told the BusinessMirror in an e-mail.
“My assessment is that the governor remains biased for keeping rates steady, or even hiking the rates, as opposed to cutting rates. The easy-and- quick response to weaker growth and below-target inflation is to cut rates. But, given that inflation targeting is forward-looking, AMT [the BSP governor] thus indicated that care is needed at its next policy rate-setting meeting,” he added.
Economists believe that the government does not need to adjust policy rates at this time.
“Should the government adjust policy rates? Not yet. This could be an outlier, unless it persists for a longer period,” University of Asia and the Pacific School of Economics Vice Dean Cid Terosa said.
Terosa said the government must remain vigilant against the likelihood of deflation, when households and businesses refuse to spend in anticipation of still lower prices down the line. To counter its debilitating impact, he said the government must increase its spending program to boost demand and push commodity prices higher.
Suboptimal government spending has been faulted for the slowdown in the country’s low output growth, measured as the gross domestic product (GDP). In the first quarter, government spending, particularly for construction projects, contracted 24.6 percent in the first quarter from expansion, averaging 17.5 percent in the same period in 2014.
GDP in the first quarter only grew 5.2 percent, the slowest since the last quarter of 2011, when GDP grew 3.8 percent.
“If it [slowdown in commodity prices] persists for another month, deflation could set in. I believe the government should spend more and stimulate spending,” Terosa said.
However, Eagle Watch Senior Fellow Alvin P. Ang and former Budget Secretary Benjamin E. Diokno said the slowdown in inflation should not be a cause for concern at the moment. They said the slowdown was largely due to so-called base impact.
Diokno said he expects inflation to average around 2 percent this year. Terosa holds the same view, but pointed out that low oil prices in the international market and the country’s stable food supply also contributed to the slowdown in commodity prices.
“There should be no fear of a deflationary situation this year. The headline 1.2-percent inflation rate in June was due to base effects. Inflation rate was high at 4.4 percent in June of last year,” Diokno said. The National Economic and Development Authority said that, despite the benign inflation environment, the government will continue to closely monitor prices given that the second half of this year is also typhoon season.
Agriculture is prone to suffer damages brought by typhoons. This, in turn, could cause commodity prices, particularly food prices, to increase.
Esguerra also said typhoons in the second half of the year could intensify as an effect of the prolonged dry spell.
“Efforts to monitor drought incidence in agricultural areas should be sustained to ensure that suitable policy actions are realized without delay. Timely importation of rice to augment domestic supply should serve as a ready measure to prevent the repeat of the high rice prices witnessed in the third quarter of 2013 until 2014, as these occurrences adversely affect the well-being of the citizenry,” Esguerra explained.
The Philippine Statistical Authority (PSA) data showed that inflation was at 2 percent in the January-to-June period. It added that slow inflation is due to the annual decrease of housing, water, electricity, gas and other fuels, and communication.
The decrease also encloses the nonalcoholic beverages, clothing, household equipment, and routine maintenance of the house, education and health.
“Aside from the steady and sufficient supply of food, inflation benefited from reduced electricity prices due to lower fuel costs. The double-digit year-on-year decline in the prices of unleaded gasoline, diesel, kerosene, liquefied petroleum gas and the decline in Meralco rates affected key oil and electricity-related commodities and services in the current month,” Esguerra added.
The PSA on Tuesday reported inflation in June slowing to 1.2 percent, the slowest since 1995. In the January-to-June period, inflation was at 2 percent, the low-end of the government’s 2-percent to 4-percent inflation target for the year.
(With Elisse Leonne P. Perez)