April inflation lower at 3%

PHILIPPINES - In Brief 07 May 2019 by Romeo Bernardo

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Inflation continued to decelerate to 3% in April, slower than the 3.3% print in March 2018 and below the 3.1% expected by analysts. Although the headline rate fell, month-on-month inflation increased to 0.3% from nil in March, traced mainly to oil-related fuel and transport costs. In comparison, monthly increases in food prices were flat, suggesting minimal impact so far from El Niño drought. Although we continue to expect inflation for the year to average below 3%, we think risks are tilted to the upside given volatility of international crude oil prices, the likelihood of prolonged El Niño, and probable higher electric power prices following recent shortages.The Monetary Board (MB) of the BSP will meet on Thursday (May 9) when government is also expected to release 1Q19 GDP results. Survey of analysts’ expectations show a toss-up between the MB cutting policy rates by 25bp and holding rates steady. Given inflation risks, we agree that either course is possible at this time, although we expect a rate cut not later than the June meeting. Another possibility, considering the slow 4.2% money supply growth in March, is a reduction in the banks’ deposit reserve requirement, something that has long been on the table.Meanwhile, with the downtrend in inflation, the local yield curve has flattened significantly since year start, with the 10-year yield falling by 110bp. Debt markets have moreover cheered the latest one-notch S&P sovereign credit ratings upgrade to BBB+. These should bode well for Philippine borrowing costs going forward.table 1.Major Sources of Inflation in April 2019**2012=100Note: Some figures may not exactly add up due to roundingSource: Philippine Statistic...