Anotherpieceofgoodnews.Consumerinflationcontinuestofall,droppingtoafour-yearlowof2.1%YoYinAugustasfoodinflationslowedandpricesinhousingandutilitiesasagroupdeclined.Indeed,exceptformiscellaneousgoodsandservices,allothermajorcategoriesintheconsumerbasketweresteadyorlowercomparedwiththepreviousmonth.Food,housingandutilities,andtransportcontributedmosttoslowinginflation(Figure1)andcanbeattributedtoadequatefoodsupplies,lowerelectricitypricesandslowerpriceincreasesintransportoperations.Theimprovementincoreinflationwasequallymarked,slidingto1.9%from2.3%inJuly,arecordlowfrom2001.
Anidealcombination.FoodinflationmayspikeinSeptemberasaresultoffloodsinAugustthatarelikelytohavedisruptedfoodsupplies.
However,webelievethiswillbetemporaryandhavemarginalimpactonaverageinflationfortheyear.Headlineinflationisaveraging2.8%in8M13.Meanwhile,nationalincomedatareleasedaweekagoshowed1H13GDPgrowthof7.6%YoY,withdomesticdemandgrowthatanevenfaster11.5%asconsumptionandinvestmentswereexpandingrobustly.Whatbothsetsofdatatellusisthatstronggrowthisbeingaccompaniedbylowinflation,anidealcombination.
Monetarypolicylikelytobeunchanged.Headlineinflationbelowthecentralbank’s3-5%targetleavesthemonetaryboardwithflexibilityinpolicy-making.Atthenextmeetingon12September,webelievemonetarypolicywillbeunchangedwiththepolicyrateremainingat3.5%andtherateonspecialdepositaccountsat2%.ThemonetaryboardislikelytowaitoutthefullimpactoflimitingaccesstotheSDAfacilitythatistotakefulleffectinNovember.
Weakpesodrivenbysentiment.Thepesohasfallenvictimtothefuriousexitofportfolioinvestments,depreciatingabout5%fromend-MaywhentalkofmoderatingmonetarystimuluswasfirstbroachedbytheUSFederalReserve(Figure2).Despiterecentweakness,wedonotthinkthecentralbankisgoingtouseinterestratestoshoreupthecurrencyasthisisnottranslatingintohigherinflation.Partly,thisisbecausetheYTDaverageofPHP41.83/USDisstillstrongerthanthe2012averageofPHP42.25/USD.Webelieveweaknessinthepesoistemporaryandreminiscent,buttoamuchlesserextent,ofwhathappenedattheheightoftheglobalfinancialcrisis.TheaveragePHP/USDexchangerateweakenedalmost7%toPHP47.64in2009butresumedappreciatingin2010toPHP45.13.Indeed,thepesohasbeenstrengtheningagainsttheUSDsince2005intandemwithincreasesininternationalreserves,interruptedonlybytheglobalfinancialcrisis(Figure3).Thisyearmaystillseeaweakerpesoaveragefrom2012butwebelievethatwithlowinflation,strongGDPgrowth,continuingsurplusonthecurrentaccountandhighinternationalreserves,pesoappreciationisboundtoresume.