The Bangko Sentral ng Pilipinas may opt to cut interest rates by the second quarter of 2019 if inflation continues to decelerate in the coming months, the local unit of Dutch financial giant ING Bank said Wednesday.
ING Bank Manila senior economist Nicholas Mapa said in a report that with 2018 inflation driven largely by supply side pressures, headline inflation could follow a sharp decline next year, similar to that of 2008.
He said food supply bottlenecks were being addressed by the government and oil prices were declining.
“Should headline inflation continue to slide in coming months, growth slow to sub-6 percent levels in coming quarters and the Fed adopts a more dovish stance, then the likelihood that the BSP reverses its stance to easing by the second quarter of 2019 will have increased,” Mapa said.
Inflation surged to 10.5 percent in 2008, more than double BSP’s then inflation target of 3.5 percent to 4.5 percent. Supply-side factors were also behind the breach (with peaks of 17.3 percent for food inflation, 15.6 percent for transport and 6.4 percent for utilities).
Mapa said after peaking at 10.5 percent in August 2008, inflation quickly fell to 7.8 percent by December 2008 and to 1.7 percent by August 2009.
“The BSP response in 2008 was to hike three times [cumulative: +100bp] in mid-2008 followed by a quick reversal in stance by fourth quarter of 2008, cutting reserves by 200bp in November and slashing policy rates by 50bp in December, with growth slowing to 2.9 percent,” he said.
“If the stars align, then the BSP may follow the same path that it did during the most recent inflation-breach episode , slashing policy rates to give the economy a much-needed break,” Mapa said.
Inflation in November eased to a four-month low of 6 percent from a nine-year high of 6.7 percent in October, pulled down mainly by slower increases in food and fuel prices, the Philippine Statistics Authority said.
This brought inflation rate in the first 11 months to 5.2 percent, higher than the upper limit of the target range of 2 percent to 4 percent this year.
The November inflation was the slowest inflation rate in four months since 5.7 percent in July 2018.