Tempered inflation

INFLATION—or the average rate of increase in the prices of basic goods and services—slowed for a seventh consecutive month in September to a new low in more than 20 years, and reinforced expectations that interest rates on bank loans will remain steady for the rest of 2015.

Consumer prices rose just 0.4 percent year-on-year in September, below economists’ expectations of 0.6 percent. The previous low was set just the month before at 0.6 percent. In its report, the Philippine Statistical Authority noted that the September rate brought the Philippines’ nine-month average to 1.6 percent, below monetary authorities’ target of 2-4 percent. Last month’s slower inflation was due to moderated utility, transport and fuel costs. The PSA actually pointed to the annual declines in the indices of housing, water, electricity, gas and other fuels and transport.

The prices of basic commodities such as fuels and transport continued to benefit from developments in the international commodities market. Crude oil prices have fallen by half to about $50 a barrel—a boon to the Philippines, which imports nearly all its petroleum requirements. This has translated to lower electricity rates of Meralco, which have been slashed for the past several months. For September, Meralco rates were 17-percent lower from a year ago.

This early, the Bangko Sentral ng Pilipinas has expressed the view that interest rates would likely remain unchanged from their low levels because of the lower-than-expected inflation rate. Its current policy rates are

4 percent for overnight borrowing and 6 percent for overnight lending—unchanged since October 2014. These rates serve as benchmarks for banks in setting their rates on loans to businesses and households. The BSP’s main task is to protect the consumers’ purchasing power by keeping prices of basic goods and services stable mainly through adjustments in interest rates that, in turn, affect how much interest banks would charge on their loans. Domestic liquidity, or the amount of money circulating in the economy, is also managed by the central bank to keep inflation in check. It uses such tools as its SDA (special deposit account) window and the proportion of bank deposits that lenders are required to keep idle by depositing these in the BSP vaults.

Moving forward, below-target inflation may also push the central bank to cut interest rates to fuel economic demand and bring price movements or inflation back to its preferred range. However, BSP Governor Amando Tetangco has reiterated that monetary authorities were watching developments in global oil prices and the possible effects of El Niño on inflation. Dryer weather caused by El Niño can reduce crop production, which would, in turn, drive up food prices.

At this point, the Philippines is not helpless in preventing El Niño from undermining the weaker-than-expected inflation this year. The government’s own economists have suggested that measures be put in place to address the adverse effects that the dry spell would inflict on agricultural production and hydroelectric power generation. These include the repair and construction of irrigation systems and farm-to-market roads, early importation of rice to avoid price surges in the international commodities market, cloud-seeding operations in affected provinces and water conservation campaigns. Expanding agriculture support structures from production areas to the consumers can also further bring down the cost of transporting goods and services. As El Niño intensifies, it has been recommended that the government likewise consider increasing the number of agricultural workers as potential beneficiaries of the Pantawid Pamilyang Pilipino Program (or the conditional cash transfer scheme) to offset farm output losses. Another measure is for the government to ensure that access to financing in the agriculture and fisheries sectors remains unhampered.

The outlook insofar as the prices of essential goods and services and bank loan rates are concerned is indeed positive. The government expects the low inflation environment exhibited in the first nine months of 2015 to persist until yearend, possibly through 2016, as global oil prices remain low without any expectation of rising significantly in the near term. But the government should be ready to address any upside risk to inflation arising from the dry weather to be triggered by El Niño.