Economists see inflation breaching target

by Lawrence Agcaoili (The Philippine Star) – Apr 8, 2018

MANILA, Philippines — Economists now see inflation surpassing the four percent upper target set by the Bangko Sentral ng Pilipinas (BSP), which may prompt monetary authorities to raise interest rates as early as this quarter.

Investment banks have raised their respective inflation forecasts for 2018 and 2019 after inflation leapt to a five-year high of 4.3 percent in March, from the revised 3.8 percent in February, using the 2012 base year, due to higher oil and food prices.

Euben Paracuelles, economist at Nomura Securities, said the Japanese firm has raised its forecast to 4.6 percent this year before easing to 3.5 percent next year due mainly to base effects.

Based on the old series using 2006 prices, inflation is expected to average five percent instead of 4.3 percent this year and 3.8 percent instead of 3.1 percent next year, Paracuelles said.

He explained the new forecast for 2018 took into account the inflation print of 4.4 percent in the first quarter as well as the view that headline inflation would continue to drift higher in the coming months.

Paracuelles said the impact of the Tax Reform for Acceleration and Inclusion (TRAIN) Law under Republic Act 10963 has yet to fully play out, especially with another round of excise tax increases on tobacco in July.

He added there are also impending increases in electricity rates, while the coal tax increases would eventually be passed on to consumers, pushing electricity tariffs even higher.

According to Paracuelles, inflation would exceed five percent by August or September before plateauing.

He said Nomura expects the BSP’s Monetary Board to raise interest rates by 75 basis points this year starting May 10.

“Even though policy rates were left unchanged last month, the path of our baseline forecast is such that the rate hikes should be relatively front-loaded, given our expectations of above-target inflation: we forecast a 25 basis point hike at each of the next three monetary board meetings in May, June and August,” Paracuelles said.

For his part, HSBC economist Noel Arbis said headline inflation on both the 2012 and 2006 series has been consistently above market expectations since the beginning of the year.

“This signals that inflation is more broad-based than initially expected, and is reflecting more than just the impact of tax reform. Higher prices on food, transportation and electricity have been widely expected, given higher taxes on fuel, sugary products, and coal, amongst other items,” Arbis said.

However, Arbis noted recent readings showed that even areas as health, furnishing and household equipment, communication, and miscellaneous goods and services that are not directly affected by the tax reform, have risen above their normal trends.

Arbis said these show signs of second-round impacts from the recent tax reform, which could lead to even higher inflation expectations.

“We expect the BSP to hike its policy rate by 25 basis points to 3.25 percent in Q2 to defend its inflation target and to keep inflation expectations anchored. We believe that consistent and consecutive readings of above-target inflation prints should be enough reason for the BSP to hike its policy rate, as an inflation-targeting central bank,” he said.

HSBC said one hike should be enough for the BSP but it could take more than just one rate hike to change inflationary sentiment if it does not act until there is clear evidence that inflation expectations have significantly shifted.

Standard Chartered Bank economist Chidu Narayanan said inflation would average 4.5 percent this year and 4.3 percent next year as the consumer price index has increased rapidly despite electricity and transport prices still not fully reflecting recent tax increases.

“We expect electricity and transport prices to rise over the next couple of months, exacerbating upside pressure on inflation. In addition, higher transport prices in the supply chain will eventually be passed on to end consumers, leading to second-round inflationary effects. A weaker Philippine peso is also likely to add imported inflationary pressure,” Narayanan said.

Stanchart said the BSP would raise benchmark rates by 50 basis points this year – 25 basis points in the third quarter and another 25 basis points in the fourth.

“With inflation rising, monetary conditions may loosen further. We expect BSP to respond to this with policy rate hikes eventually. However, given policy-makers’ reluctance to hike just yet, we expect rate hikes to start in H2. We expect only a very shallow hiking cycle,” Narayanan said.