The Philippines’ trade deficit in August narrowed 33.1% YoY to US$2.41b, lower than market consensus of US$3.6b. Imports in August fell 11.8% YoY, dragged by raw materials, intermediate goods and capital goods. Particularly, imports of iron and steel, transport equipment and cereals and cereal preparations declined by 44.2%, 29.1%, 23.4% YoY respectively. Meanwhile, exports rose 0.6% YoY driven by gold (+93.2%) and electronics products (+6.6%). Net external demand should be GDP growth accretive as trade deficit narrows. However, lower imports of capital and consumptions goods suggest soft domestic demand growth.

Headline CPI rose 0.9% YoY in September, lower than consensus expectation of 1.1% (bringing year-to-date inflation to 2.8% YoY). This is the lowest growth rate since June 2016 due mainly to base effects as inflation peaked in Sept-Oct last year (+6.7% YoY). Food & Non-alcoholic Beverages declined by 0.9% YoY as prices of rice, corn, vegetables and sugar declined during the month. We note rice posted a bigger drop in Sept (-8.9% YoY). This reflects the impact of measures by the government (particularly The Rice Tariffication Law) to address food supply and distribution issues. In addition, transport prices declined to -0.9% YoY (In 2018, the Dubai crude benchmark reached its highest levels in Sept-Oct). Against this backdrop of benign inflation and downside risk to global growth, the market expects the BSP to cut policy rate by another 25 bps by 1Q20.

The BSP cut its overnight policy rate by 25 bps to 4.0% on Sept 26, as expected. This is the third cut this year bringing the cumulative total to 75 bps. In addition, the BSP cut its FY19 inflation projection to 2.5% (from 2.6% previously). The following day, the BSP announced another reduction in the reserve requirement ratio (RRR) of banks (by 1 percentage point to 15% for commercial banks, 5% for thrift banks and 3% for rural banks) to be effective on the first week of November 2019.