6 June 2018
Philippines: May inflation surprises on the downside

The May inflation rate of 4.6%, which is at low end of central bank forecast, reduces pressure to hike policy rates later this month. Uncertain second-round effects should keep BSP vigilant

Lower-than-expected May inflation could delay further central bank tightening

May inflation surprised on the downside as food, non-alcoholic beverages and utilities posted MoM disinflation. This brought annualized headline inflation to only 4.6%, below the market’s median forecast of 4.9% and at the low end of Bangko Sentral ng Pilipinas (BSP’s) forecast of 4.6% to 5.4%. The government encouraged rice millers in the major rice producing regions to sell some inventory at a 10% discount to April prices. Tighter monitoring of retail prices also helped. We anticipate that the delivery of government imported rice to major ports this month will bring back low-priced subsidized rice to the market and offset other price pressures. Oil prices have eased also but a weaker PHP is likely prevent the full translation of the drop in global oil prices at the pump. We believe that recent developments indicate that inflation is at or near the peak. These developments also cut the pressure on BSP to hike policy rates this month. However, we still expect BSP to hike policy rates at the 21 June meeting to pre-empt second-round effects and stabilize inflation expectations. Tri-partite regional wage boards are considering higher minimum wages while regulators deliberate on higher minimum transport fares. BSP’s 4.6% and 3.4% 2018 and 2019 inflation forecasts assume a 3.6% increase in minimum wages and a modest increase in transport fares. Significantly higher increases may result in a double peak of inflation while keeping inflation expectations on an uptrend. The other consideration is a weakening PHP. Further weakness could still push prices higher. Manufacturers have signaled price increases to cover higher costs resulting from higher oil prices and a weaker PHP. While we argue for a rate hike this month, the likelihood is now closer to even.

China: Why the central bank won’t cut reserve requirements

China's central bank is supporting the onshore bond market by expanding collateral for the medium-term lending facility (MLF). This will reduce contagion risks though standalone default cases could continue. Still, we think it's unlikely the central bank will cut its reserve requirements ratio (RRR) for banks in June. Here's why

Central bank expands collateral of medium-term lending facility

Since 1 June, the central bank (PBoC) has expanded the collateral of its medium-term lending facility (MLF), which is a lending facility for banks. 

MLF collateral expands to:

  1. AA-rated bonds issued by financial institutions for small and micro enterprises, green financing and agricultural financing.
  2. AA+, AA-rated corporate bonds (priority to accept bonds involving small and micro enterprises, green economy).
  3. High-quality micro-enterprise loans and green loans.

Before this expansion, the central bank only accepted sovereign bonds, central bank notes, China Development Bank and other policy bank bonds, local government bonds and AAA corporate bonds as collaterals for MLF. The interest rate on MLF is now at 3.3%.

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Good MornING Asia - 06 June 2018

Markets can go up for a day with nothing driving them, but it seems they need more to sustain a rally - there's still a dearth of drivers

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