Inflation views

PHILIPPINES - In Brief 06 Sep 2019 by Romeo Bernardo

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Government yesterday released inflation data for August showing the headline rate dropping from 2.4% in July to 1.7%, largely due to base effects as well as lower fuel and electricity prices.The latest inflation print is in line with our forecast and we reiterate here what we said in our outlook report (“Over the Hump?”).Our assessment is that the inflation environment will remain benign until 2020. We expect additional excise taxes on oil and tobacco scheduled for next year to have only modest impacts on the headline rate, which we expect to average below 3% this year and next.We are anticipating another 25bp policy rate cut this year, likely when the Monetary Board meets later this month. This will bring the overnight RRP rate to 4%. Thereafter, we expect a pause in the BSP’s current easing cycle.Easier monetary conditions will also come through more cuts in banks’ reserve requirement ratio (RRR), currently at 16% for commercial banks. Our best guess at this time is a 2ppt reduction by 1H20 in line with policy pronouncements to bring the RRR to a single digit over the next 3-4 year.Finally, we note global expectations of looser monetary conditions especially in the U.S. Should the Federal Reserve cut its policy rate again, we expect local monetary authorities to keep step.