INFLATION is expected to show a decline in October, analysts said, but the country’s economic growth will remain weak due to a continued slowdown in the overall economy.
“We believe we could see inflation moderate in year-on-year terms from the previous month while we are likely to see the third quarter GDP (gross domestic product) growth remain subdued as overall economic momentum slows further,” said Nicholas Antonio Mapa, senior economist at ING Manila Bank.
Inflation had fallen for the six months prior after hitting a 14-year high of 8.7 percent in January. However, it accelerated for a second straight month to 6.1 percent in September, up from 5.3 percent in August.
This prompted the Bangko Sentral ng Pilipinas (BSP) policymaking Monetary Board to halt hiking of interest rates for the last four meetings to assess both inflationary pressures and the economic situation.
On September 21, monetary authorities said that inflation was on a “higher path.”
They added, however, that it was still expected to return to the 2.0- to 4.0-percent target in the fourth quarter of this year. On October 21, the Monetary Board raised its policy rates by 25 basis points.
“Although Remolona has shown his laser sharp focus on the inflation mandate, as any good inflation targeting central bank should, he perhaps would want to see the growth numbers as well given his data-driven mantra,” Mapa said, referring to BSP Governor Eli Remolona Jr.
“There have been calls to not downplay the impact of rate hikes on fighting second-round effects and expectations, however, there is also a need to highlight the impact of rate hikes on growth and economic output,” Mapa added.
He emphasized that the central bank has monetary tools but can’t fully counteract price pressures arising from supply side factors.
“We can see that economic growth is the collateral damage in this whole exercise where BSP will have little choice but to target growth, in a bid to slow economic activity enough to snuff out whatever is left of demand side pressures,” Mapa said.
“So even if [the] BSP is carrying out rate hikes to fend off second-round effects and to corral inflation expectations, it will always be on the back of slowing down growth first,” he added.
Inflation target still achievable
For his part, Miguel Chanco, Pantheon Macroeconomics’ chief economist, maintains the belief that achieving the target-range inflation by year-end is still possible.
The upcoming inflation report, he said, is expected to indicate a reversal in the recent acceleration of the headline rate.
“We expect inflation for October to fall to 5.3 percent from September’s four-month high of 6.1 percent, as the reversal of the August surge in rice prices finally filters through,” Chanco said.
“Taking into consideration the data so far, it looks like the economy managed to avoid a technical recession, but the slowdown in growth likely persisted,” he added.
Chanco believed that the central bank’s unexpected rate hike last October 27 was just a strategy before the US Federal Reserve’s meeting this week to support the recent stability of the Philippine peso.
He asserted that the Monetary Board wouldn’t decide at its planned mid-November meeting until they reviewed the October inflation report and the third-quarter GDP data, which would be available the week before the meeting.