R. Dan J. Roces, Chief Economist

Philippine inflationary pressures continue to dissipate as January 2019 inflation slowed to 4.4% yoy from 5.1% in December. The January figure was lower than Bloomberg’s market median forecast of 4.5% and lower than our estimate by 0.2 percentage points. For the first quarter of the year, we computed the average CPI inflation to be at 4.8%, on assumptions that price pressures from rice and oil will dissipate albeit at a much slower pace, while allowing for monetary adjustments made in 2018 to work their way through the traditional channels of monetary policy.

However at its current pace, we now expect CPI inflation for this quarter to move closer towards 4%-4.2% (upper bound), the former well within the government’s 2-4 percent target range for inflation. Inflation expectations also appear to have eased, supported by the BSP’s policy actions late last year.

Food inflation continued to ease for January, reflecting better domestic food supply conditions. Rice prices moderated for the third consecutive month on the back of higher rice imports and larger supply from the recent harvest. Moreover, electricity rates also decreased for the month owing to lower generation charges.

We continue to see cooling inflation with outlook tilted to the downside, and certainly the latest figure has given the central bank some leeway in holding off policy rate hikes. Government has already mentioned that this latest inflation data will be discussed alongside other pertinent indicators in the upcoming monetary policy meeting of the BSP scheduled on Thursday, 07 February. We still maintain our view that the BSP will keep policy rates on hold at the meeting, yet could start cutting key policy rates and banks’ reserve requirement ratio as soon as inflation rate goes back to the 2-4 percent target range; which may occur as early as the second quarter of 2019.