La Niña boost to agri output seen producing ‘aggressive’ rate cuts

LA NIÑA is expected to lead to improved agricultural production, thereby bringing down food prices and strengthening the hand of central bankers seeking “aggressive” rate cuts, Capital Economics said.

“A La Niña could bring with it favorable growing conditions for crops in Southeast Asia, and help to put downward pressure on food prices across the region,” Capital Economics Assistant Economist Ankita Amajuri said in a report.

“It adds to the reasons to think the upcoming rate-cutting cycle in the region will be more aggressive than what is currently priced in by financial markets.”

The government weather service estimates a 55% probability of La Niña emerging in the Philippines in the October to December period, lingering until the first quarter of next year.

“Our view is that central banks in the region will begin cutting interest rates later this year. La Niña increases the odds that easing cycles will be even more aggressive than our forecasts, which are already more dovish than the consensus,” Capital Economics said.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. has signaled potential rate cuts by August.

He said the central bank can cut by up to 50 basis points (bps) for the full year, with a 25-bps cut each in the third and fourth quarters.

“The latest inflation data from across the region paint an encouraging picture, with the headline rate falling back in almost every country that has so far published figures for June,” Ms. Amajuri said.

Philippine inflation eased to 3.7% in June from 3.9% in May, the seventh straight month that inflation has kept within the BSP’s 2-4% target range.

“We expect inflation to fall a little further in most places. Our forecast is that global oil prices will fall back again over the coming months, which should result in a decline in fuel price inflation,” Ms. Amajuri said.

“Meanwhile, subdued economic growth will help to keep a lid on underlying price pressures. We also expect food price inflation to drop back further, helped by better growing conditions now that the recent El Niño has come to an end.”

The report cited the World Meteorological Organization, which forecasts a 70% chance of La Niña emerging between August and November.

“La Niña typically brings wetter weather to Southeast Asia and is likely to provide a boost to producers of rice, coffee and sugar, who have been adversely affected by dry conditions over the past year. An increase in production would help bring down agricultural prices, which remain elevated,” it said.

Capital Economics said moderate-to-severe La Niña events in the past have been tied to falling rice prices.

“Rice is a staple food across much of the region, accounting for around 5-10% of the CPI basket in many countries.”

In June, Philippine rice inflation eased to 22.5% from 23% a month earlier. Rice accounted for 45.2% of overall inflation, equivalent to 1.7 percentage points of the headline rate.

“It is possible that the positive impact of La Niña will be less pronounced than the negative effects of the preceding El Niño because of climate change. While global warming amplified the heat and droughts caused by El Niño, it is likely to counter the cool weather brought by La Niña,” it said.

“However, it won’t be until the final quarter of the year that we will know for sure how severe this La Niña will be, and our commodities team are not making any changes to their agricultural price forecasts at this stage.” — Luisa Maria Jacinta C. Jocson