What low inflation means for the PH

The inflation rate finally hits below the government’s predicted target. The Philippine Statistics Authority reported that the headline inflation rate is now at 1.7% -- a significant drop from July 2019’s 2.4%. The PSA associated the decline to the slower annual increase in the heavily-weighted food and non-alcoholic beverages index.  

As inflation cools down, several key institutions driving the Philippine economy will benefit. The Bangko Sentral ng Pilipinas is expected to cut rates in September to support the economic growth in the long run which should also aid in reducing the decrease in GDP growth. 

BSP Governor Benjamin Diokno assured that the central bank is taking note of the positive developments. It has since cut the benchmark lending rate by 25 points last August 8, 2019. The BSP also slashed the borrowing rate by 50 points to date.  

Further reductions in the reserve requirement ratio for banks will encourage liquidity. In a bigger setting, change in quotas in terms of rice tariffication is also being put in place as part of the government effort to tame inflation. 

The Philippine Stock Exchange is also reaping the benefits of cooling down the inflation rate. In terms of index performance, the PSEi rose 0.73 percent while the all-shares was also up 0.43 percent.  

All other key sectors performed positively except for mining and oil. In the report, property firms led the increase with 0.96% along with services and holding firms that closed at 0.83% and 0.82% respectively. 

Outlook, risks in the Philippines’ inflation 

KMC Research affirms that the current headline inflation rate is also well within the BSP’s target. Senior analyst, Jeanne Cayabyab attribute the further tempering of inflation to the rice tariff that is currently in play. She also credited that food inflation is responsible for the drop as it accounts for 32% of the Consumer Price Index (CPI) basket.  

“As inflation rate continues to normalize, it gives the BSP more flexibility to cut its policy rate again at the next Monetary Board meeting this month,” Cayabyab said.  

However, KMC analysis shows that BSP is expected to be cautious of the deepening trade tensions between the US and China. This poses a downside risk to inflation along with ongoing geopolitical risks that raised global economic uncertainty.  

KMC also remains positive that this will drive economic growth as inflation continue its downward trend coupled with lowered borrowing costs, household consumption. This will also improve and bolster flagging growth momentum by yearend.