By Elijah Joseph C. Tubayan, Reporter
INFLATION is seen to remain above 6% until October, bolstering expectations of more rate hikes from the central bank, economists from Nomura said.
“Our new trajectory suggests headline inflation will stay elevated at around 6% in September and October before gradually easing to 5.6% by year-end,” Nomura said in its monthly economic commentary published on Friday.
Nomura also revised its full-year inflation forecast upward to 5.1% from 4.9% previously.
This was after inflation in August accelerated to 6.4% from 5.7% a month ago and 2.6% a year ago. The eight-month average in the rise in prices stood at 4.8%, above the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range.
Nomura said its view of a gradual 50-basis point (bp) hike by central bank still stands.
“Regardless, we still expect BSP to hike rates by a further 50bp this year, with a 25bp hike each in September and November,” it said.
“Moreover, there are upside risks as higher headline inflation and further PHP depreciation could stoke inflation expectations and prompt BSP to hike again by a relatively aggressive 50bp this month; it could also do more in November.”
The central bank has raised its interest rates by 100 basis points since May in a bid to curb inflation.
However, Mr. Espenilla has said more non-monetary action is needed to properly address inflation, particularly on supply side factors.
The BSP expects inflation to peak this month or in October.
Moreover, Nomura said it will maintain its gross domestic product (GDP) growth target despite the slowdown in the second quarter, noting “early indicators suggest growth is off to a strong start in Q3.”
“We maintain our 2018 GDP growth forecast of 6.5%, implying that growth will rise to 6.8% [year-on-year] in H2 from 6.3% in H1, driven by strong domestic demand, particularly investment by both public and private sectors as infrastructure projects progress,” it said.
The economy grew 6% in the second quarter from 6.6% a year ago and in the first quarter this year. This brought the first half GDP growth figure to 6.3% versus 6.6% in the comparable period in 2017.
“We also expect continued solid private consumption, as real disposable household incomes appear to be rising with the personal income tax cuts under ‘TRAIN’ tax reforms offsetting higher inflation,” Nomura added, referring to the Tax Reform for Acceleration and Inclusion (TRAIN) law.
Apart from lowering incomes taxes, the TRAIN law also lowered estate and donors tax rates, removed some value-added tax exemptions, and raised taxes on tobacco, fuel, automobiles, minerals, coal, documentary stamps, among others. It also introduced new levies on sugary drinks and cosmetic procedures.
Nomura also said the fiscal deficit remains “manageable,” as the “TRAIN tax reforms early this year have boosted revenues by more than expected,” despite large public spending.
Nomura said the fiscal deficit stood at 2.4% of GDP as of the first half, wider than the 2.2% in the same period last year, but below the 3% ceiling.
“A downturn in the tech cycle would hurt electronics-dominated exports, while faster-than-expected Fed rate hikes or further contagion from global EM turmoil could spark capital outflows. Political concerns could increase with President Duterte’s drop in popularity and the mid-term elections in May,” it added.

RELATED ARTICLESMORE FROM AUTHOR