Angelo Taningco
Economist, Treasury Group
Philippine inflation again rose above market expectations as indicated by its higher reading for February. Headline CPI inflation accelerated to 4.5% yoy in February (market forecast: 4.2%, our forecast: 4.3%)—the highest since August 2014—from 4.0% in January. Similarly, core CPI inflation jumped to 4.4% yoy from 3.9% in the same period. Clearly, these figures are already above the BSP’s inflation target range of 2.0% – 4.0%; however, the CPI used for the aforementioned inflation makes use of the old base year, i.e., 2006.
The Philippine Statistics Authority just released its updated CPI inflation data, which uses a newer base year (2012): it shows headline CPI inflation at 3.9% yoy for February compared to 3.4% in January. Clearly, the new 2012-based CPI inflation is lower than the old 2006-based data. Moreover, the new CPI inflation data is within the central bank’s target range. Using the new CPI inflation series, we still expect headline inflation to rise, potentially breaching the target range’s upper end in the second and third quarters, before decelerating in the last quarter of the year. We still maintain our full-year CPI inflation forecast of 4.0%, but we think the risks are tilted to the upside with inflation pressures potentially to come from rising global oil prices, peso depreciation, domestic food supply disruptions, and restrictive global trade policies.
We just changed our call on what we think would be the likely decision of BSP’s Monetary Board in its upcoming meeting on 22 March: we now think that it is more likely for the Board to keep the policy rate unchanged. This is a deviation from our previous expectation of a 25 basis point hike for that meeting. This adjustment in our view stems from the fact that the new CPI inflation data through February falls within the target range; that recent statements of government’s economic managers, including top BSP officials, appear to signal a dovish tone, emphasizing that inflation is still manageable and is expected to decelerate to within the target range by next year; and that we think that thus far, there’s lack of evidence that inflation expectations have risen significantly. However, for the full-year, we still maintain our 25bps rate hike forecast on the back of our projection that inflation will elevate further in upcoming months and that depreciation pressures on the peso will persist. We think such adjustment in monetary policy could materialize as early as June.
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