Report: Price spike to spur Q1 rate hike

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INFLATION will likely speed further to 4.5% in the next two months on the back of higher crude prices and new taxes on some basic goods, according to a monthly report that said this expectation could trigger a rate hike from the central bank by March.

Analysts at First Metro Investment Corp. (FMIC) and the University of Asia & the Pacific (UA&P) said they expect inflation to pick up in March and April at 4.5%, which will overshoot the 2-4% target band set by the Bangko Sentral ng Pilipinas (BSP) for 2018.

“[W]e think that inflation will accelerate in H1 but will start to decelerate thereafter as food and crude oil prices normalize,” FMIC and UA&P said in the February issue of The Market Call published yesterday.

Prices shot up overall by four percent in January, beating market expectations to clock the fastest in over three years.

BSP Governor Nestor A. Espenilla, Jr. has attributed the overall price spike to the implementation of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, as well as to rising oil and food prices. At the same time, the BSP chief said the impact of tax reform is likely temporary and that price hikes would eventually “stabilize.”

The TRAIN law introduced higher or additional taxes on fuel, cars, coal, sugar-sweetened drinks, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions. It also introduced an excise tax for cosmetic surgery.

These are expected to more than offset lower rates for personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes.

For FMIC and UA&P, inflation will likely linger above four percent in the coming months after clocking another four percent in February. Inflation clocked 3.3% in February last year and 3.4% in March and April 2017.

With faster price increases, the FMIC said a rate hike from the central bank can be expected at the March 22 policy review of its Monetary Board.

“With breaching of the upper limit of the BSP’s inflation target and consistent with its desire to avoid overheating (esp. manifested in asset prices), we think BSP will raise its policy rate by 25 bps (basis points) to 3.25% in Q1,” the FMIC said.

The central bank has already bumped up its 2018 full-year inflation forecast to 4.3%, admitting that price movements this year will push inflation beyond the target range. If realized, inflation will surge from the 3.2% average in 2017.

The BSP’s Monetary Board kept benchmark interest rates unchanged during their Feb. 8 meeting, but noted that the central bank is “watchful” of inflation trends, particularly for second-round effects of the tax reform.

Analysts have said that surging prices, coupled with the one-percentage-point cut in reserve requirement ratio for big banks that takes effect next week, bolster the need for rate tightening.

Mr. Espenilla, however, said the reserve adjustment has a “neutral” effect on monetary policy.

Any additional money supply unleashed into the system — estimated at P90 billion — will be mopped up by the BSP through its weekly term deposit auctions, Mr. Espenilla added.

Zeno Ronald R. Abenoja, director at the BSP’s Department of Economic Research, said separately that while inflation is likely to trend higher in the months ahead, the central bank is not hard-pressed to raise rates.

“Price pressures from previous tax reform episodes were viewed as temporary in nature and did not require a policy response from the BSP,” Mr. Abenoja said in a presentation before the Bank Marketing Association of the Philippines, citing data from the implementation of the 12% value-added tax starting February 2006 — from 10% previously — as well as implementation of “sin” tax reform from January 2013.

Despite surging prices of some basic goods, FMIC and UA&P said they expect gross domestic product (GDP) growth to pick up to 7-7.5% this year — from 2017’s 6.7%, 2016’s 6.9% and a 6.2% average in 2010-2015 — amid expectations that the government’s infrastructure development program will go “full speed” after a rather slow start.

“Accelerating infrastructure spending and likely double-digit growth of capital goods imports in 2018 should combine with robust export growth to drive faster GDP growth in 2018,” the report read.

“We believe that global recovery in some markets (US, EU, China and Japan) will continue to prop up export demand from the Philippines and will bring 2018 exports to a faster growth pace.”

The current administration plans to spend P1.1 trillion this year on priority infrastructure projects, representing one-fourth of the full-year national budget and equivalent to 6.3% of GDP. This forms part of the P8.13-trillion infrastructure spending plan until 2022, when President Rodrigo R. Duterte ends his six-year term.

Meanwhile, exports grew by 9.5% in 2017, recovering from a 2.4% contraction the previous year, according to the Philippine Statistics Authority.

If realized, The Market Call’s GDP growth forecast means that the government’s 7-8% target for 2018 will be attained, keeping the Philippines in the ranks of the fastest-growing major economies in Asia and the Pacific. — Melissa Luz T. Lopez