BSP sets ‘measured’ inflation response

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jeepney driver
Economists are watching out for transport fare hikes and minimum wage increases that will further drive inflation to spike. -- BW FILE PHOTO

By Melissa Luz T. Lopez
Senior Reporter and
Carmina Angelica V. Olano

THE RISE of prices of widely used goods pierced the ceiling of the official 2018 full-year inflation target to clock its fastest pace in at least five years, prompting the central bank to signal a “measured” policy response amid calls for interest rate hikes.

The Philippine Statistics Authority (PSA) on Thursday reported inflation in March at 4.3% year on year, faster than February’s downward-revised 3.8% and March 2017’s 3.1%. Headline inflation clocked 3.8% year-to-date.


This was also the fastest pace in at least five years computed under the 2012-based consumer price index (CPI), according to available PSA data.

The rate compares to the 4.2% median forecast in a BusinessWorld poll last week, overshoots the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range for full-year 2018 but is within the 3.8%-4.6% estimate the central bank gave for the month.

BSP Governor Nestor A. Espenilla, Jr. told reporters in WhatsApp message that while inflation’s pickup has remained within expectation, monetary authorities were readying a “measured” policy response.

“There’s a pick-up in inflation that we recognize. Markets are already factoring this,” Mr. Espenilla said.

“The coming task of the MB (Monetary Board) is to carefully evaluate the appropriateness of a measured policy response to firmly anchor inflation expectations in line with our forecast that inflation targets will continue to be met in 2018-19,” he added, noting that monetary authorities are “closely monitoring the situation.”

Latest government data show faster price increases in the indices of beverages and tobacco (18.6% from 16.9%); food and non-alcoholic beverages (5.9% from last month’s 4.8%); housing, water, electricity, gas, and other fuels (2.9% from 2.6%); furnishings, household equipment and routine maintenance of the house (2.7% from 2.4%); restaurant and miscellaneous goods and services (3.0% from 2.5%); health (2.4% from 2.1%) and communication (0.3% from 0.2%).

The food-alone index, meanwhile, went up 5.7% in March from 4.8% in February and 3.1% in March 2017. Specifically, higher annual mark-ups in March were observed in the indices of corn (11.1% from 10.4%), fish (12.9% from 11.2%), rice (3.6% from 2.8%), fruits (7.1% from 6.2%) and vegetables (six percent from 2.7%).

“The government must continue to be proactive in maintaining price stability and cushioning the impact of higher consumer prices on the poor following the uptick in inflation in March 2018,” the National Economic and Development Authority (NEDA) said in a statement released yesterday.

NEDA also noted that farm gate prices of palay (rice) have been on an upward trek since the second week of January, contributing to higher wholesale and retail prices of rice.

“The government remains vigilant to price pressures, especially on food consumed by the poor such as rice,” said Rosemarie G. Edillon, NEDA Officer-in-Charge and Undersecretary for Policy and Planning.

Economists interviewed were largely in agreement that this strengthened the case for rate hikes amid inflationary pressures from the newly implemented tax reform and the weakening peso, even as they differed on timing.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, noted comments by Mr. Espenilla growing slightly more hawkish, pointing out that he could be building up the case for a rate hike later this year.

“I would say that the ‘hawkishness’ rose…,” Mr. Asuncion said, even as he clarified: I still perceive the same stance as before: watching closely and recognizing the upward pressure and stands ready when needed to pull the trigger.”

“I still see that the room to not increase rates is still way bigger than the room that says otherwise.”

For Angelo B. Taningco, economist at Security Bank Corp. (Security Bank), “[e]ven if the inflation rate for the month is above the government’s inflation target range, I think the central bank sees this as transitory and that it will eventually fall back to within the range by next year.”

“However, I still think there’s a chance for the central bank to initiate a modest monetary policy tightening by the middle of the year — possibly as early as June — especially if economic growth would be solid, inflation and inflation expectations are steadily rising, and the peso depreciation will be persistent,” he added.

For Michael L. Ricafort, head of economics and industry research division at Rizal Commercial Banking Corp. (RCBC): “If inflation consistently breaches the four percent upper-end of the BSP’s inflation target, there is a chance for upward adjustment in its key policy rates.”

Nomura economists expect three successive rate increases from the BSP starting next month.

“In terms of monetary policy, we maintain our forecast of a total 75 basis points (bps) in rate hikes by BSP this year,” said Nomura economists Euben Paracuelles and Charnon Boonnuch.

“Even though policy rates were left unchanged last month, the path of our baseline forecast is such that the rate hikes will be relatively front-loaded given our expectations of above-target inflation,” they added.

“We forecast a 25-bp hike in each of the next three monetary board meetings in May, June and August.”

On the other hand, analysts Shashank Mediratta and Sanjay Mathur at ANZ Research said that while inflation remained “elevated” in March, they expect the BSP to keep rates unchanged for the rest of 2018.

Mr. Espenilla has said separately that solid economic growth can “absorb” the impact of higher interest rates, as the government expects a 7-8% expansion this year from 2017’s 6.7% and a 6.3% average in 2010-2016.

The BSP kept rates steady at 2.5-3.5% during its March 22 review even as inflation continued its ascent as of end-February, with the view that domestic economic activity will remain upbeat and price increases will normalize by 2019.

“While some market indications point to rising inflation expectations, nothing at this point suggests that the market expects persistent significant surge in consumer prices through 2019 that would warrant a change in the monetary policy stance,” BSP Deputy Governor Diwa C. Guinigundo also said over the weekend in defense of the MB’s latest decision.

The BSP will review its policy stance on May 10.

Economists were also in agreement that consumer prices will not be slowing down anytime soon.

“We expect it to continue to drift higher as the impact of TRAIN reforms have yet to fully play out,” Nomura’s Messrs. Paracuelles and Boonnuch said, referring to the Tax Reform for Acceleration and Inclusion law that took effect in January.

For RCBC’s Mr. Ricafort, inflation could pick up further in April due to higher transport fares.

“Inflation could average above four percent in 2018, but could be temporary/transitory due to higher cost/supply-side factors [exceeding demand],” Mr. Ricarfort said, adding that it “may start to normalize upon crossing 2019.”

For Security Bank’s Mr. Taningco: “For the month of April, my initial reading is for the inflation rate to hover slightly above four percent amid food price inflation, weak peso, elevated oil prices and electricity rate hike.”