By Lee C. Chipongian

The country’s inflationary environment has shown signs of “significant deceleration” and is expected to be lower in the last two months of the year which may convince the Monetary Board of the central bank to pause on further strong actions next week.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. has hinted of a less hawkish stance following October’s 6.7 percent steady inflation outturn. “The Monetary Board will take into account these (October inflation) and other incoming data including GDP (to) determine if there’s still need for further policy rate adjustments,” he said yesterday.

The Monetary Board will meet on November 15 for its seventh policy actions this year. In the meantime, the third quarter GDP growth will be released this Thursday.

The BSP, to rein in high inflation which continue to be driven mainly by supply side factors as reflected in the uptick in food and energy prices, has raised key rates by 150 basis points since May.

BSP Deputy Governor Diwa C. Guinigundo said the BSP’s view that inflation has already reached its peak at 6.7 percent in September has just been confirmed with the results of October data.

“We should be seeing lower annual inflation rates for the rest of 2018 through the next two years 2019 and 2020,” he said.

Guinigundo pointed out that the month-on-month inflation has declined from 0.9 percent in September to just 0.3 percent in October even as the year-on-year inflation remained at 6.7 percent.

He added that “both monetary and non monetary measures by the government have begun to take effect in mitigating price pressures. If the rice tariffication bill is passed by Congress during this fourth quarter of 2018, inflation in 2019 is expected to further decline by 0.7 percentage point.”

Espenilla said the October inflation rate of 6.7 percent – same as in September – supports its assessment that inflation pressures are moderating, finally. “It’s a significant deceleration although the headline figure remains elevated,” he said.

As for second round effects, the BSP chief noted that it was not too evident in October. “Second round effects are muted so far. That augurs well for a return to inflation target by 2019,” he said.

The October inflation results is within the BSP’s forecast range of 6.2 percent to seven percent.

The Monetary Board – BSP’s policy-making arm – on September 27 raised its 2018 inflation forecast to 5.2 percent from an earlier estimate of 4.9 percent. Next year’s inflation outlook has now breached the two-four percent target, at 4.3 percent from a previous forecast of 3.7 percent while the 2020 forecast remains at 3.2 percent.

In a separate statement, the central bank said inflation has moderated but “could remain elevated for the rest of the year” or above the target of two-four percent.

“The start of the harvest season for rice and improved weather conditions have contributed to some downward price pressures on rice prices,” said the BSP. “In addition, the implementation of non-monetary measures is also expected to result in a deceleration in food prices.”

It added that the central bank “will continue to monitor the evolution of expectations and further second-round effects ahead of the November (next Thursday) policy meeting. The BSP remains firm in its commitment and readiness to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability.”

Based on a recent BSP survey of private sector analysts, the risks to inflation in 2018 remain tilted to the upside and – other than higher and volatile global oil prices – possible upside risks are: impact of the implementation of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law on the prices of domestic goods; weakening peso; rise in the prices of food and other commodities due to adverse weather conditions and supply shortage; and higher utility rates.

Analysts also continue to be concerned about any rise in wages and transport fares, strong domestic demand during the holiday season and due to the upcoming election, and the delay in the implementation of the government’s mitigating measures against rising inflation. They also see the higher government spending on infrastructure, global trade war, and higher inflation expectations as closely-watched price uptick triggers.

On the other hand, the key downside risks to inflation includes fiscal policy actions or mitigating measures such as the rice tariffication, Pantawid Pasada program, and unconditional cash transfers, according to the BSP. It also said that the recent and expectations of further policy rate hikes by the BSP and slower global growth are downside risks factors.

The BSP also noted that analysts anticipate inflation to moderate in 2019 and 2020 as the impact of TRAIN tapers off, global oil prices stabilize, and the government implements mitigating measures to temper inflation.