June inflation at 2.7%

PHILIPPINES - In Brief 05 Jul 2019 by Romeo Bernardo

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The government today announced that the headline inflation rate fell from 3.2% in May to 2.7% in June, lower than what analysts expected (2.9%). Data show that lower rice and oil prices combined to pull down the June inflation rate. Following the rice tariffication law liberalizing rice trade, prices have fallen by an average 3.7% year to date and 7.5% from their peak in October last year. Notwithstanding global oil market uncertainties and gyrating oil prices as well as risks to other food prices (e.g., meat and vegetables), we think domestic inflation is well under control and continue to expect the full year average to fall in the lower half of the BSP’s 2-4% inflation target. In light of expectations of U.S. monetary easing, local market interest rates have fallen since May, with yields across the curve lower by about 75bp on average and the 3M rate sliding to 4.4% yesterday, below the BSP’s 4.5% overnight borrowing rate. Ample financial market liquidity may also be seen in oversubscription to BSP’s term deposits (by over 2x in this week’s auction). At Monday’s “Pre-SONA” Forum highlighting the Duterte administration’s economic achievements during its three years in office, economic managers stuck to the commitment of ramping up infrastructure spending to 7% of GDP by 2022, “consistent with achieving an 8% GDP growth.” Putting all these together, we think the likelihood of another 25bp policy rate cut as early as next month rather high. The Monetary Board meets on August 8. Its decision will be guided by new data available then, including July inflation, 2Q19 GDP growth, and US Fed action.