Inflation surge spurs rate hike view

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Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. (Left) said “the higher-than-expected June inflation outcome is a setback” while Socioeconomic Planning Secretary Ernesto M. Pernia called the latest pace “unwelcome”, even as the former said the central bank was working “to ensure that inflation returns to within the 2-4% target range as soon as possible” and the latter said he expected the overall increase in prices of widely used goods “ to peak in the third quarter and taper off by October”.

By Jochebed B. Gonzales, Senior Researcher
Melissa Luz T. Lopez, Senior Reporter
and Elijah Joseph C. Tubayan, Reporter

INFLATION surged in June to a fresh five-year high as it beat market and government estimates given for the month, leaving the door open for another policy interest rate hike.

Prices of widely used goods and services clocked in at 5.2% last month to mark another peak in at least five years, the Philippine Statistics Authority announced on Thursday.

The pace surged from May’s 4.6% and 2.5% in June 2017, maintaining a steady ascent for six straight months. June also saw the fourth straight month that inflation pierced the Bangko Sentral ng Pilipinas’ (BSP) 2-4% full-year 2018 target range.

June inflation pierced the 4.3-5.1% range estimated by the BSP’s Department of Economic Research, the 4.9% estimate of the Department of Finance and the 4.7% median of BusinessWorld’s poll.

Core inflation, which excludes volatile food and energy prices, picked up to 4.3% last month from May’s 3.6% and 2.1% in June 2017.

Year-to-date, headline inflation averaged 4.3%, compared to the BSP’s 4.5% forecast for the entire 2018.

The PSA attributed the acceleration primarily to the faster annual increases in the heavily weighted food and non-alcoholic beverages index (6.1% from 5.7% in May 2018); alcoholic beverages and tobacco (20.8% from 20.5%); transport (7.1% from 6.2%); housing, water, electricity, gas and other fuels (4.6% from three percent); education (four percent from 1.8%); furnishing, household equipment and routine maintenance of the house (three percent from 2.9%); and communication (0.4% from 0.3%).

The food-alone index picked up pace to 5.8% last month from May’s 5.5% and June 2017’s 3.1%.

“The higher-than-expected June inflation outcome is a setback,” BSP Governor Nestor A. Espenilla, Jr. told reporters in a mobile phone message.

“We will review and update our situational assessment and forecast inflation path. This will shape the strength and timing of our next monetary policy response to firmly anchor inflation expectations.”

Mr. Espenilla said the BSP “re-affirms its strong commitment to ensure that inflation returns to within the 2-4% target range as soon as possible.”

Socioeconomic Planning Secretary Ernesto M. Pernia said in a statement that the June turnout is “unwelcome news,” but noted that inflation so far is “just slightly” higher than the government’s target range for the year.

Still, Mr. Pernia, who heads the National Economic and Development Authority (NEDA) as director general, said that the latest inflation reading was “rather unexpected.”

“I myself was hoping that it would not breach five percent… We’re hoping that the peaking has happened already,” he said in a media briefing yesterday.

NEDA Undersecretary Rosemarie G. Edillon noted that pressures came chiefly from “imported inflation” due to rising global crude prices.

For Land Bank of the Philippines (LANDBANK) market economist Guian Angelo S. Dumalagan, inflation spiked on increasing oil prices and “seasonal factors.”

“An important seasonal factor is the start of classes, which likely caused an acceleration in the price of education. Likewise, weather disturbances possibly caused a similar inflationary effect on food items, particularly rice and corn,” Mr. Dumalagan said.

Union Bank of the Philippines (UnionBank) chief economist Ruben Carlo O. Asuncion shared this view, adding that a “persistently weak peso” is also a probable factor for the rising cost of imported products that include production inputs.

The BSP’s Monetary Board introduced back-to-back 25-basis point rate hikes in its May and June policy meetings to rein in future inflation.

For Emmanuel A. Leyco, economics professor at the Asian Institute of Management and former undersecretary at the Department of Social Welfare and Development, businesses and household sectors “will have to make adjustments since most have much lower inflation rate assumptions for 2018.”

“Combined with the depreciating peso, a higher inflation rate will mean much weaker purchasing power for the Filipino households,” he added.

OUTLOOK
Given the latest inflation pace, economists believe that price pressures now warrant another tightening move from the BSP during its Aug. 9 policy review.

“The high inflation point for June would likely require further monetary policy response as early as the August meeting. Real policy rate is deeper in the red indicating that a more aggressive economic policy response would be needed,” said Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, noting that real interest rates have fallen to -1.7% from -0.4% in January.

Observers have been pointing out that the BSP has been behind the curve as it kept interest rates low for too long. The central bank has kept its policy stance since September 2014 before its first rate hike in nearly four years on May 10.

“There may have been a little bit of a slip in timing in increasing the policy rates,” NEDA’s Mr. Pernia said.

Nevertheless, the NEDA chief remains hopeful that “inflation is kept at bay and will taper off by year end.”

“We expect inflation to peak in the third quarter and taper off by October, government needs to implement necessary measures, both short-term and long-term, to address the impact of inflation,” he said.

Analysts at Nomura noted that prices have picked up “across the board” and will keep rising faster until August or September, thus requiring BSP intervention.

“We believe inflation expectations are also likely to rise further, as evident in rising demand for wage increases. As such, we also now see some risk that BSP may deliver additional rate hikes this year, taking the policy rate above our 3.75% forecast,” said Nomura economists Euben Paracuelles and Charnon Boonnuch.

UnionBank’s Mr. Asuncion shared this expectation, saying: “I foresee another rate hike this August.”

“I have also inputted another possible rate hike by end of 2018 (50% chance). This is based on further volatility of the peso and a continuing elevation of inflation,” he said.

“[T]his may not be the peak, but we may see a waning momentum moving forward. I see second-round effects weighing down further on price levels in the coming months.”

At least three regions, so far, have approved wage hike petitions in the face of surging inflation, while regulators last Wednesday gave provisional approval for a P1 hike in jeepney fare to P9 for the first four kilometers in Metro Manila, Central Luzon and the Cavite-Laguna-Batangas-Rizal-Quezon region.

For Rajiv Biswas, chief economist for Asia-Pacific at IHS Markit, the BSP is “facing a perfect storm of pressures to hike policy rates further” as a result of rising inflation as well as the impact of the widening current account deficit and rising US interest rates that have pressured the peso to weaken.

For LANDBANK’s Mr. Dumalagan, however, the BSP may first have to “spot signs of second-round effects” when the next inflation report is released, a case he described as a “game-changer as far as monetary policy is concerned.”

“While June 2018’s strong inflation figure increases the chances of another BSP rate hike next month, it certainly does not guarantee of more tightening moves from the BSP amid views that this year’s elevated inflation is temporary,” Mr. Dumalagan said.

“Furthermore, the next action of the BSP might also be hinged on how local financial markets react to developments here and abroad. Higher volatility domestically could prompt further action from the BSP.”