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Central bank sticks to outlook of slower inflation by Q4

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INFLATION should peak in the next two months before slowing closer to target, the country’s central bank chief said, noting that tax-related price pressures have been “tapering off.”

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said the biggest price spikes will be seen in August or September, before settling within the 2-4% target band by next year.

“Latest baseline forecasts have shifted higher over the policy horizon, suggesting that inflation will remain elevated in 2018 with the peak occurring sometime in the third quarter, and will revert to the inflation target of 2-4% in 2019,” Mr. Espenilla said in a speech before the Rotary Club of Makati on Tuesday.

Inflation has averaged 4.5% as of end-July as it touched a multiyear high of 5.7% last month.

In response, the central bank fired off its strongest response in a decade as it raised benchmark rates by 50 basis points (bp) in its meeting on Thursday last week, following hikes of 25 bp each in May and June.

Monetary authorities have long conceded to missing their inflation target this year, citing persistent “supply-side” pressures that are beyond the BSP’s purview. Much of the blame has been pinned on rising global oil prices, thinning buffer stocks of cheap rice, as well as the impact of the first of up to five planned tax reforms which imposed additional levies on fuel, cigarettes, alcohol and sugary drinks starting Jan. 1.

“In a supply shock episode, central banks would typically not react, as these historically tend to be transitory or short-lived in nature, but remain vigilant and undertake action against incipient signs of second-round effects,” Mr. Espenilla said.

However, Mr. Espenilla said the central bank has been seeing signs that the price spikes are becoming less fueled by tax reform-related adjustments.

“We also see the tapering off of month-on-month changes of CPI items related to excise tax adjustment in the first five months. The month-on-month changes for electricity, tobacco and sweetened beverages are also slowly tapering off as we pass seven months of 2018,” the BSP chief said.

“This supports our view that the impact of excise tax adjustments are transitory.”

The central bank sees headlline inflation averaging 4.9% this year.

Mr. Espenilla explained that the BSP continues to see risks to inflation in the face of impending wage increases, pending petitions for higher transport fares and utility rates, a faster-than-expected rate tightening in advanced economies, and a further increase in rice prices.

He added that the three rate hikes announced so far this year — cumulatively 100bps — signal the BSP’s “strong commitment to ensuring macroeconomic stability,” noting that these steps “will help reduce further risks to inflation” without stunting overall growth.

Robust domestic activity shows that the economy can absorb rising interest rates, even as growth eased to 6.3% last semester against a 7-8% full-year goal, from 6.6% in 2017’s first six months.

Mr. Espenilla noted that “non-monetary intervention” like shifting to a regular tariff scheme for rice from the current import quota system — expected to slash retail prices of the staple by P7 per kilogram — should help tame inflation. The House of Representatives approved this measure earlier this week.

Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, said he expects inflation to peak at around six percent in August or September, but will likely stay above five percent for the rest of 2018.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, said he expects third-quarter inflation to average 5.9% before easing to 5.8% from October-December.

Finance Secretary Carlos G. Dominguez III, who sits in the policy-setting Monetary Board, said the central bank “has a very good capacity to analyze economic trends.” He said in a media forum yesterday that the BSP will take “appropriate action” to respond to emerging trends in the local and global scene.

Bank analysts have noted that the central bank remained hawkish in its Aug. 9 policy statement, which they said left the door open for further rate hikes. — Melissa Luz T. Lopez