BSP Likely to Leave Policy Rate Unchanged at Next Policy Meeting

Headline inflation in the Philippines improved for the fifth consecutive month in March to 3.3% yoy from 3.8% in February, its slowest inflation rate since December 2017. On quarterly basis, inflation slowed to 3.8% yoy in 1Q19 compared to 5.9% in 4Q18. The country’s headline inflation was weighed down by lower cost of food and non-alcoholic beverages, which accounts for 38.3% of the total weight in the CPI basket, having eased for the fifth consecutive month to 4.7% yoy (5.6% in February). This was due to decline in prices of rice amid the start of the El Nino season and sustained rice imports. Inflation remains in the Government’s inflation target range of 2-4% in 2019. Going forward, we believe some upward pressure may arise from higher global crude oil prices as well as longer than expected El Nino. As a result, we believe that Bangko Sentral Ng Pilipinas (BSP) will likely adopt a wait-and-see approach at its next monetary policy meeting on 9 May 2019, leaving its policy rate unchanged at 4.75%, following its five rate hikes in 2018. This will be the third straight meeting of holding policy rate unchanged since December 2018. Core-inflation which slowed to an 11-month low of 3.5% yoy (3.9% in February) suggests that inflation may remain tepid in the near term.

Seperately, Philippines’ trade deficit in February narrowed for the second consecutive month to US$2.8bn from US$3.9bn in January, its narrowest deficit since March 2018. The improvement in February’s trade deficit was due to the smaller decline in export growth of 0.9% yoy in February compared to -6.7% in January while imports posted a slower growth of 2.6% yoy from 3.6% in January. The slower fall in exports was supported by continued growth in total agro products of 6.5% yoy (3.8% in January), while manufactures declined for the third straight month albeit a slower pace of 2.4% yoy (-2.5% in January). Going forward, we expect the downward pressure on export growth to likely continue as electronic products, which is the country’s top export continued to contract in February for the third straight month by 0.9% (-6.7% in January). Furthermore, uncertainties surrounding the trade war between US and China may also continue to weigh on Philippines’ trade performance given that the US and China remain among their top export destinations.

In the same week, Indonesia’s retail sales expanded by 9.1% yoy in February from 7.2% in January, according to Bank Indonesia’s Retail Sales Survey. This was its highest growth since December 2016. The jump in retail sales was driven partly by the Lunar New Year celebrations, where higher demand was registered for food, drinks and tobacco (14% yoy), cultural and recreation (26.5%) and apparel (33.7%). Amid the upcoming Eid-ul-Fitr in June, we also expect retail sales to be stable and supported in the months leading up to it. However, demand will likely normalise after the festive season. Nevertheless, with higher retail sales currently, inflation, which trended lower to 2.5% in March, may likely experience some upward pressure in the near term.

Source: Affin Hwang Research - 12 Apr 2019