BSP flags longer El Niño may affect inflation

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Metro Manila (CNN Philippines, April 26) -- Inflation is broadly seen to ease further in the coming months to below three percent, but the Bangko Sentral ng Pilipinas (BSP) said there could be price pressures should El Niño turn out longer than expected.

BSP Assistant Governor Francisco Dakila, Jr. said central bank officials will be assessing the impact of the much longer drought seen affecting 16 provinces this year, counting it as among factors which could hasten price increases of basic goods.

“We note that there is a new risk factor that is emerging: the possible lengthening of the El Niño episode… There is now a slightly higher than 50 percent chance that El Niño will continue on to the second half of the year,” Dakila said during a media briefing Friday.

As of April 5, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) said there is now a 75 percent chance for El Niño to last until August, which is later than the previous June forecast.

Dennis Lapid, director of the BSP’s Department of Economic Research, clarified that the latest data point to a mild drought which has caused “limited damage” to farm output so far. The Department of Agriculture pegged production losses due to El Niño at ₱5.7 billion, well above their initial estimate of ₱1.7 billion.

PAGASA also expects 47 provinces hit by a dry spell, while 16 other areas are seen to suffer dry conditions.

So far, the dry spell has not manifested in the first quarter inflation numbers which averaged 3.8 percent, marking the return to the central bank’s 2 to 4 percent target and showing a marked decline from the 5.9 percent rate posted in the last quarter of 2018.

The BSP sees inflation down to three percent in 2019 versus last year’s 5.2 percent, largely as food prices have dropped sharply as supply normalized, particularly for rice. These estimates, which were released in March, already factor in the impact of the recently-signed Rice Tariffication Act.

Authorities expect the influx of cheap rice from abroad to bring down the inflation rate by as much as 0.6 percentage point.

“El Niño continues to be a weak phenomenon, and if you look at rice prices, so far they have continue to go down... That’s an argument that for now, we have not really seen the impact of El Niño on food prices, but oil is something I think we need to watch out for,” Dakila added.

He said the inflation downtrend will persist for the coming months and may even touch lower than 3 percent towards the second half of the year.

Rising world crude prices could also exert pressure on local commodity prices, but he noted that the recent rate at $65 per barrel is not worrisome for now.

“We have also conducted some scenario analysis which says that we can go as high as $80 per barrel and still remain comfortably within our inflation target,” Dakila added.

Meanwhile, slowing global growth may act as counterweight and help temper inflation.

BSP Governor Benjamin Diokno said bank analysts see inflation settling below four percent until 2020, noting that they are seeing more downside risks to the outlook.

The latest central bank survey among private sector economists showed average inflation estimates at 3.3 percent this year and 3.4 percent by 2020.

The government will release April inflation data on May 5. Last month saw inflation ease for the fifth straight month at 3.3 percent.