Angelo Taningco
Economist, Treasury Group
Yesterday, the BSP’s Monetary Board (MB) decided to keep its key interest rates and reserve requirement ratios unchanged, consistent with our view. This decision was made despite January headline inflation beating market expectations at 4.0%, which is already at the upper end of the government’s inflation target range. Several market participants have adjusted their monetary policy outlook by now expecting a policy rate hike in the next MB meeting scheduled on 22 March. We maintain our view that the central bank will likely initiate a 25bps policy rate hike in March, as we think inflation expectations may have already risen starting this month given January’s above-than inflation partly due to the TRAIN law. Also, a March rate hike in the US may trigger capital outflows and lead to a rapid peso depreciation, thus warranting some monetary tightening in order to ensure financial stability. We still think that this modest rate hike is needed given that TRAIN’s inflationary impact is “transitory” as it arises from the supply-side (i.e., cost-push inflation), and is consistent with the government’s thrusts of ensuring a manageable inflation environment and accelerating economic growth.
We know that one month of inflation tally is not enough to determine whether inflation expectations have indeed climbed amid the TRAIN law since other inflation factors were involved last month—including the rapid peso depreciation, rising global oil prices, and food supply disruptions from weather disturbances. We surmise the central bank will wait for more evidence of a possible increase in inflation expectations, and we think one of these would be its monthly inflation survey forecast of private institutions covering February. However, the above-than-expected January inflation could lead the survey respondents to revise up their inflation forecasts, thereby raising inflation expectations. If this proof materializes, then we could see a modest policy rate hike in March in order to anchor the monetary policy settings to inflation expectations.
Meanwhile, the BSP has raised its inflation forecast for 2018 and 2019 to 4.3% (from 3.4%) and 3.5% (from 3.2%). Noticeably, the forecasts show that inflation is expected to breach the target range’s upper end this year but will revert to the range next year. This indicates that the inflationary impact of TRAIN is “transitory”, especially since this is more of cost-push inflation, i.e., inflation emanating from the supply-side of the economy. Moreover, the assumptions of the forecasts may very well include an increase in global oil prices and a weaker peso. Though the start of this month has shown global oil prices receding and the rate of change in the USDPHP becoming smaller; if such trends persist, then we could very well have a flatter-than-expected inflation trajectory. More so, the government wants to shift its rice importation policy from quantitative restrictions (QRs) to tariffication, which could slash rice prices and ultimately CPI inflation by as much as 1 percentage point; this tariffication policy may have likely become more important to be enacted into law this year in order to temper inflation expectations and future inflation. At this juncture, we will wait for incoming inflation data as part of reassessing our inflation forecasts.
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