Angelo Taningco
Economist, Treasury Group
On 10 May, the Bangko Sentral ng Pilipinas (BSP) Monetary Board decided to raise its policy rate (overnight RRP rate) by 25bps to 3.25%, consistent with our view and market consensus. This was the first time in more than 3 years that the policy rate has been increased. Overnight deposit and lending rates were likewise raised by 25bps each, lifting the interest rate corridor (IRC). In its monetary policy statement, the central bank has indicated its readiness “to undertake further policy action as necessary to ensure the achievement of its price and financial stability objectives”. We believe that in the context of accelerating inflation and rising inflation expectations, another 25bps policy rate hike would likely take place this year, and may occur as early as in the third quarter (Q3).
We have argued that such modest rate hike is warranted in order to help temper inflationary pressures, which have been strengthening lately driven by TRAIN’s excise taxes, domestic food supply disruptions, peso depreciation, and rising global oil prices. Amid base effects, we continue to expect inflation to remain on an upward trajectory this quarter and next quarter—to potentially reach its peak in August this year—before it starts to decelerate in the last quarter of the year. We also recognize inflation expectations of consumers and firms to be on the rise. These developments have led us to foresee inflation to be over and above the government’s inflation target range of 2%-4% for this year but to move back to the range next year. Meanwhile, the BSP has raised its CPI inflation forecasts, to 4.6% from 3.9% for 2018 and to 3.4% from 3.0% for 2019. We likewise adjusted our own inflation forecasts to 4.7% from 4.2% this year and to 3.3% from 3.0% next year.
We observed that the risks to our inflation outlook are tilted to the upside. We believe price pressures will intensify if global oil prices will move up further amid worsening geopolitical tensions in the Middle East and/or if global tariffs climb triggered by a deterioration in US-China trade relations. Moreover, we think inflation will accelerate further if more petitions for higher minimum wages, transport fares, and electricity rates are approved and if food supply disruptions remain unsolved. Also, if the peso depreciation persists amid balance of payments (BOP) deficit on trade-in-goods deficit and on capital outflows triggered by risk-off events and US policy rate normalization, we think this would raise import costs, and thereby sparked cost-push inflation. Conversely, once the government’s rice importation policy of quantitative restrictions (import quota) is replaced by import tariffs (tariffication), we think this can reduce rice prices and thus, help moderate inflation.
Along this line, we expect the central bank to continue to be vigilant in promoting stable prices and financial stability by remaining data-dependent—to closely monitor inflation and inflation-related developments—and to take further monetary policy action if warranted. Since we believe inflationary pressures will likely be stronger on the back of rising inflation expectations over the very near term, we think another round of modest monetary tightening this year may be needed in order to preempt future inflation to run faster than its current rate. We don’t think such move would curtail economic expansion, which was 6.8% last quarter and could very well mimic the same pace for the full year.
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