BSP keeps watch as inflation spikes

By Mark T. Amoguis
Researcher
with Melissa Luz T. Lopez
Senior Reporter

THE OVERALL INCREASE in prices of widely used goods and services surged in January by its fastest clip in more than three years, topping market consensus on the back of the impact of higher taxes.

The Bangko Sentral ng Pilipinas (BSP) said that while the actual pace was the ceiling of its estimate range for the month, it would “closely” monitor the situation and was “ready to take timely action” should policy intervention be needed to bring inflation to heel.

Preliminary Philippine Statistics Authority (PSA) data showed inflation picking up to four percent, faster than December’s 3.3% and the 2.7% recorded in January 2017.

January’s pace was faster than the 3.5% median in a BusinessWorld poll of 14 economists and hit the top end of BSP’s 3.5-4% range and the Finance department’s (DoF) 3.3% estimate for that month.

It was also the fastest reading since October 2014’s 4.3%.

Core inflation, which excludes volatile food and energy items, was also faster during the period at 3.9% compared to 3% in December and 2.5% in January last year.

BSP expects full-year inflation to average 3.4% this year, higher than the 3.2% finish in 2017 but still within an official 2-4% target range.

“The faster overall price increase of goods can be attributed mainly to the 4.5% increase in the food and non-alcoholic beverages segment,” the National Economic and Development Authority (NEDA) said in a statement.

“The push in inflation is partly due to TRAIN, considering particularly the excise on fuel and additional ‘sin’ taxes,” NEDA quoted its director-general, Socioeconomic Planning Secretary Ernesto M. Pernia, as saying, referring to Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act enacted in December and which took effect last month.

At the same time, Mr. Pernia said effects of tax reform would be “minimal and temporary.”

In a separate statement, the DoF said “[t]he rise in inflation in January may be partly traced to the excessive price adjustment for the ‘sin’ tax, the sugar-sweetened beverages (SSB) tax in the TRAIN law in the case of non-alcoholic beverages, and weather disturbances in the case of vegetables.”

BSP Governor Nestor A. Espenilla, Jr. told reporters that January’s inflation spike remained within expectation, even as it hit the ceiling of both its estimate for that month and a 2-4% full-year target for 2018.

“The higher January 2018 reading was expected by the BSP although it is at the top end of our forecast for the month,” Mr. Espenilla said in a WhatsApp message.

“We think these are temporary drivers of inflation and would eventually stabilize,” he said of TRAIN’s impact on prices of widely used consumer items.

RA 10963 imposed an additional P2.50 per liter excise tax on diesel and P3/liter on kerosene at a time world crude prices have been hitting their highest levels in nearly three years. The new law also either hiked or imposed additional taxes on cars, coal, sugar-sweetened drinks and a host of other items.

The central bank, Mr. Espenilla said, “will be closely monitoring the situation and stand ready to take timely action based on our evaluation of all relevant data.”

The DoF said in an economic bulletin that “Of the four percent inflation, 2.1 percentage points was accounted for by ‘sin’ products and sugar-sweetened beverages”.

The food and non-alcoholic beverages index, which account for nearly 38.98% of the consumer price index (CPI), rose 4.5%, faster than the 3.5% logged in December 2017 and 3.4% in the same period last year.

Meanwhile, alcoholic beverages and tobacco more than doubled year-on-year with the index growing 12.3% last month compared to 5.6% in January 2017 and 6.4% in December 2017. Broken down, inflation for tobacco increased 17.4% from 6.9% a year prior while that of alcoholic beverages went up 4.8% from 3.7%.

For food alone, the index went up 4.5% in January compared to 3.7% a month earlier and 3.6% in January 2017.

Non-food inflation, meanwhile, was 3.1%, faster than two percent a year ago.

Other sub-indices that contributed to inflation were: furnishing, household equipment and routine maintenance of the house (two percent); health (2.6%); transport (3.2%); and restaurant and miscellaneous goods and services (3.7%).

“Although electricity prices last month were noted to be lower, the momentum of the first tranche of the tax reform program is undeniable,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank).

RATE HIKE TIMING ANYONE’S GUESS
“I will still stick to my expectation that the BSP will not tweak its monetary policy any time soon. I see that the BSP has already included this high January inflation level in its forecasts,” Mr. Asuncion said.

“So far, I think they still have enough elbow room since the impact of the TRAIN law is expected in the first two or three months… I’m also sticking to my forecast of a mid-year and end-year tweaks by the BSP, a total of 50 basis points (bps).”

ANZ Research economists Eugenia Fabon Victorino and Sanjay Mathur said they see the central bank raising benchmark rates by 25 bps at its March 22 meeting.

“In our view, firm domestic demand will keep inflationary pressures strong, as opposed to the central bank’s stance that price drivers are temporary,” the ANZ analysts said, pointing out that full-year inflation will likely breach four percent.

Nomura analysts likewise see inflation settling at 4.3% for 2018, a steep jump from last year’s 3.2%.

This builds up expectations of a more hawkish tone from the BSP at its monetary policy review on Thursday. “The likelihood of a tightening move at Thursday’s meeting has increased significantly,” Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, said separately. “We are now looking at advancing the timing of our rate hikes and are reviewing our two-rate hike forecast for 2018.”

For his part, Angelo B. Taningco, Security Bank Corp. economist, said that it would be worthwhile for the central bank to monitor future inflation trends before adjusting its monetary policy stance. “Against this backdrop, I expect the central bank to raise its key interest rates modestly, i.e. by 25 bps, in its second monetary policy meeting scheduled in March,” he said.

For Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines: “The possibility of a rate hike from the BSP this Thursday has increased as a result of January’s strong inflation figures, both headline and core.”

He added that the BSP might take a proactive approach by hiking rates sooner rather than later, considering the natural time lag of monetary policy.

“While a rate hike from the BSP is on the table for this year amid rising inflationary pressures, any decision to hike policy rates on Thursday might be a close call, especially since majority of the BSP’s communications so far are leaning towards steady policy settings,” he said.

“It is also important to note that January’s inflation has been affected by transitory weather disturbances. Hence, it might be overstating the impact of the TRAIN law.”

Rajiv Biswas, chief economist at IHS Markit, shares this view, saying: “With headline CPI inflation hitting the top of the central bank’s inflation target range, the BSP is expected to tighten monetary policy at least twice in 2018” with the first hike implemented this week and the next one in the second quarter.

“Surging CPI inflation, strong GDP (gross domestic product) growth and rapid credit expansion are all combining to put the BSP on a more hawkish stance with monetary policy tightening expected soon.”