July inflation boosts rate hike odds

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The Philippine Statistics Authority attributed July’s acceleration to the faster annual increases in nine out of 11 commodity groups, led by food and non-alcoholic beverages. -- BW FILE PHOTO

By Melissa Luz T. Lopez
Senior Reporter

INFLATION surged faster than market expectations in July to clock a fresh multi-year high, the Philippine Statistics Authority (PSA) reported on Tuesday, increasing the odds of an aggressive interest rate hike from the central bank on Thursday.

The PSA reported a 5.7% inflation rate in July, picking up for the seventh consecutive month on a year-on-year basis. It was also the fifth straight month that inflation pierced the central bank’s 2-4% full-year target average.

July’s pace was faster than the 5.2% recorded in June and 2.4% in July 2017.

Headline inflation rates in the Philippines (July 2018)

This was near the midpoint of the 5.1-5.8% estimate range provided by the Bangko Sentral ng Pilipinas (BSP) Department of Economic Research, but was higher than the 5.5% median in a BusinessWorld poll of economists last week.

Year-to-date, headline inflation averaged 4.5%, above the BSP’s 2-4% target for the year and matching monetary authorities’ full-year forecast average.

The PSA attributed July’s acceleration to the faster annual increases in nine out of 11 commodity groups, led by food and non-alcoholic beverages (7.1% from 6.1% in June 2018); alcoholic beverages and tobacco (21.5% from 20.8%); transport (7.9% from 7.1%); housing, water, electricity, gas, and other fuels (5.6% from 4.6%); and health (3.7% from 2.7%) among others.

Meanwhile, the food-alone index in July was higher at 6.8% compared to June’s 5.8% and July 2017’s 2.9%.

Core inflation, which excludes volatile food and energy prices, clocked in at 4.5% in July — from June’s 4.3% and the year-ago 2.1% — and averaged 3.5% so far this year.

BSP Governor Nestor A. Espenilla, Jr. told the Senate Committee on Finance yesterday that the faster inflation was caused by higher global oil prices, additional excise taxes, as well as heavy rains and flooding that constricted supply of rice and farm products.

These are “generally outside the scope of monetary policy,” the central bank chief noted, even as he assured that monetary authorities were ready to take “decisive” action as needed.

“We will consider all the latest data updates in determining the strength of our follow-through response in the upcoming policy meeting of the Monetary Board this Thursday,” Mr. Espenilla told reporters in a mobile phone message.

Mr. Espenilla has committed to a “strong policy response” at the Monetary Board’s Aug. 9 meeting in the face of inflation’s uptrend.

Mr. Espenilla’s assessment was shared by economic managers in the fiscal policy side, with a separate joint statement by the Department of Budget and Management, Department of Finance and the National Economic and Development Authority saying that “the current price pressures emanate mainly from supply-side factors.”

“Addressing supply constraints to curb inflation is the utmost priority of the government,” the statement read.

It noted in particular the country’s declining rice stock inventory due to weather disturbances as “part of the supply problem.” It said that in July, rice stocks were at 2.36 million metric tons (MT), 8.2% lower than the 2.57 million MT in July 2017 and 18.8% less than June’s 2.91 million MT, adding the National Food Authority’s rice buffer as “remaining almost depleted.”

To curb inflation, the state economic managers in the statement reiterated their call for the implementation of the fuel subsidy program for public utility vehicles, the approval of a bill that will impose a regular tariff scheme for rice from the current import quota scheme that is expected to slash retail prices of the staple by an estimated P7 per kilogram, and the need to tighten the watch against profiteering.

Alan A. Tanjusay, spokesperson of the Associated Labor Unions-Trade Union Congress of the Philippines, in a statement criticized the government’s and employers’ “lack of social responsibility and social safety net support” for workers and their families. “We were looking forward for employers and companies to provide at least non-cash fringe benefits to their employees at these extraordinary times, but no such thing is happening,” he said.

Given these developments, analysts are betting that the BSP will raise benchmark rates for the third consecutive time, although some are saying that a heftier 50-basis-point (bp) increase may be announced this week to temper inflation pressures.

Monetary policy makers have raised rates in two moves of 25bps each in their May and June meetings in a bid to curb price pressures.

Benjamin Shatil, economist at JPMorgan Chase Bank, said the higher-than-expected inflation reading merits a 50bp increase and further policy tightening in the coming months. “Should price pressures continue to rise through 3Q, the risk would be of further tightening at the Sept. 27 meeting, ahead of the current JPMorgan forecast of 50bps this week and another 25-bp hike in 4Q,” Mr. Shatil said in a market report sent yesterday.

ANZ Research pointed out a “broad-based” rise in prices, with core inflation at 4.5% versus June’s 4.2% pickup. The research group sees a 25-bp increase, but said a more aggressive tightening move is now a “distinct possibility.”

Nomura economists Euben Paracuelles and Charnon Boonnuch “expect BSP to hike by 50bps at its 9 August meeting, taking the policy rate to four percent.”

‘“In addition, we think the policy statement should remain hawkish, with BSP clearly leaving the door open for more rate hikes ahead.”

Rajiv Biswas, chief economist for Asia-Pacific at IHS Markit, said: “With the BSP already having hiked policy rates in May and June, another rate hike is looming on Aug. 9, when the BSP Monetary Board meets again to consider monetary policy settings.”

“The BSP is facing a perfect storm of pressures from rising domestic inflation, a deteriorating balance of payments position and peso weakness during H1 2018 due to the impact of US Fed rate hikes,” Mr. Biswas noted.

“With many Asian central banks having tightened monetary policy already during 2018… IHS Markit expects the BSP to hike policy rates further during the next 12 months.” — with Elijah Joseph C. Tubayan and Vann Marlo M. Villegas