Latest Inflation Slips to 2.1%
Lower food, housing and utility price rises contributed to the decline in inflation to 2.1 % in August, below consensus forecast of 2.4%. Muted price pressures can also be seen in a benign core inflation of 1.9%. With year to date inflation averaging 2.8%, below the low end of the central bank’s target band of 3-5% for 2013, the market view is that the Monetary Board will keep current policy settings intact in its meeting on September 12. Policy rates are at 3.5% and 5.5% for overnight borrowing and lending, respectively and the SDA rate is at 2%. While inflation expectations remain well anchored at present, there are increasing price pressures from the peso's continued weakness and the impact of geopolitical tensions on world oil prices. The peso has lost about 9% ytd against the dollar while oil prices breached $100/bbl in recent weeks. Demand side risk to future inflation stems mainly from high money growth - 20% in June - especially with a complete exit of trust funds from SDA by end-November. July M3 data, expected to reflect the impact of phase 1 of the mandatory SDA withdrawals, will be released tomorrow.Meanwhile, rising bond yields averaging 33.7bps across the curve in August, likely reflects more the global market turmoil than rising inflation expectations.