Brief Macro: Philippine CPI: Normalization Begins in January with Another Inflation Fade Out and more

In this briefing:

1. Philippine CPI: Normalization Begins in January with Another Inflation Fade Out
2. FLASH: BoE Sees Gloom Before Room to Raise Rates
3. India: Monetary Policy Review – One More Rate Cut Likely
4. Behaving Predictably – China’s Car Sales in 2018 Were Not a Sign of Economic Weakness

1. Philippine CPI: Normalization Begins in January with Another Inflation Fade Out

• Headline inflation in January eased to 4.4%YoY (vs 5.1%YoY in December) although its annualized rate was back in positive territory (1.2%). Easing food inflation (5.6%YoY) and narrowing CPI rental & household utilities (4%YoY) supported inflation’s fade out. 

• Core inflation edged lower to 4.4%YoY. Still in excess of BSP’s inflation target range, the core CPI print bodes well for an unchanged policy rate in this week’s scheduled meeting of the Monetary Board.

• Non-food CPI’s momentum (2.4% annualized) now in positive territory although benign, offers policymakers a good enough reason to maintain the policy rate setting.

• Positive, annualized inflation rates registered by CPI restaurants and miscellaneous goods & services, and HH furnishings & equipment, since 2H18 affirm some discretionary expenditures stood resilient against peaking inflation in 4Q18 while other consumption items either wilted or stalled. As inflation fades this year, we expect resurgence in discretionary expenditures that would lead consumption recovery. With thriving discretionary demand and its potential 2019 recovery, likely shadowed by broader non-food CPI (60% of the CPI basket) upticks, policymakers bias to sustain its policy rate at 4.75% would stay intact. 

• A lackluster inflation backdrop augurs for a staggered bank reserve cut while allowing a positive, real interest rate condition to develop.

• Tactically, we are a sell on market rallies since the favorable inflation news including the CPI’s trajectory’s downtrend this year had been widely anticipated. Likelihood of an unchanged policy rate setting in today’s Monetary Board meeting also supports our tactical recommendation. 

2. FLASH: BoE Sees Gloom Before Room to Raise Rates

• The MPC was unanimous in leaving policy unchanged again in Feb-19, as expected.
• Downgrades to demand projections seem excessive, in my view, with too much weight put on soft surveys. Inflation is forecast weaker in the short-term, owing to energy, but is revised up through the policy-relevant medium-term.
• Inconsistent assumptions around Brexit were explored in an Inflation Report box, where the net effect of uncertainty and sterling was ambiguous for policy. A rate hike after withdrawal negotiations resolve still looks likely.

3. India: Monetary Policy Review – One More Rate Cut Likely

At the first monetary policy meeting of the new RBI Governor, the MPC reduced the policy rate by 25bps to 6.25% and changed the stance of monetary policy to ‘neutral’ from ‘calibrated tightening’. Both were as expected by analysts and the markets. The MPC also significantly lowered its inflation projection and it now expects headline CPI inflation to remain below 4% for the foreseeable future. This new revised forecast, implies that there is space for one more rate cut. I expect the MPC to use this space in its April policy review before going on pause for the subsequent few policy reviews. Today’s rate cut does not, by itself, suggest that the new Governor will be unduly dovish. That said, given the slightly surprising voting pattern, the minutes of the policy meeting (to be released after two weeks) will provide a bit more color on the changed dynamics in the MPC.

4. Behaving Predictably – China’s Car Sales in 2018 Were Not a Sign of Economic Weakness

When one is looking for something in an economy it is usually not difficult to find corroborating evidence, any economy and at any time. Economists and analysts are masters of massaging data to suit their own agendas. China’s car sales in 2018 are a case in point.