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Poll puts Feb. inflation beyond target

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BSP
The central bank is expected to start raising policy interest rates soon in response to spiking inflation.

By Melissa Luz T. Lopez
Senior Reporter

INFLATION likely picked up further in February as prices of food, fuel and electricity rose faster on higher taxes, analysts said in a BusinessWorld poll that also bared mounting bets on a central bank rate hike.

A poll of 14 economists yielded a 4.2% median forecast for the month, with 10 analysts saying that the overall pace of price increases went faster than the four percent rate seen in January. If realized, this would also surge from February 2017’s 3.3% and would pierce the 2-4% target set by the Bangko Sentral ng Pilipinas (BSP).

The estimate falls within the 4-4.8% estimate range given by the BSP’s Department of Economic Research and will be the fastest since the 4.3% pace clocked in October 2014.

The Philippine Statistics Authority (PSA) will report official inflation data on Tuesday.

Inflation Poll

“As older inventories are used up, the full impact of higher taxes under first package of tax reform may have already been largely reflected in terms of upward adjustments on the prices of fuel, sweetened beverages, tobacco, coal/mining, and vehicles,” said Michael L. Ricafort, economist at the Rizal Commercial Banking Corp.

Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act that took effect Jan. 1, imposed additional taxes on fuel, cars, coal, sugar-sweetened drinks and a host of other items. Among others, TRAIN imposed an additional P2.50 excise tax per liter of diesel and P3/liter for kerosene, which came at a time of three-year highs for world crude prices. The new law also introduced an excise rate of P6/liter on drinks containing caloric or non-caloric sweetener and P12/liter on drinks containing high-fructose corn syrup.

Aside from TRAIN-related price movements, the economists also cited the higher cost of food items like fruits, beef, pork and rice. Among others, dwindling buffer stocks of the National Food Authority have driven rice prices up for seven straight weeks, according to PSA data.

The peso’s depreciation against the dollar also likely put pressure on import prices last month, as the currency touched fresh 12-year-lows versus the dollar, added Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines.

Most economists in the poll said that inflation will keep picking up over the next few months, owing to base effects and as other producers and suppliers introduce staggered price adjustments.

“The full effect of TRAIN will be felt over around half a year or more,” said Victor A. Abola, economics professor at the University of Asia & the Pacific.

“Raising prices in a competitive environment may not happen too fast, as players would observe what others are doing.”

Six economists expect the BSP to raise benchmark rates during its March 22 review with inflation in an upward path, as February would mark the second straight month of an increase.

The BSP has kept its monetary policy stance unchanged since September 2014, although procedural cuts were introduced in June 2016 for the shift to an interest rate corridor. Rates currently range from 2.5-3.5%.

However, the central bank reduced the reserve requirement ratio (RRR) on big banks by a percentage point to 19%, effective last Friday – a move that is expected to unleash some P90 billion into the financial system. Some observers said this was tantamount to an easing of monetary policy, in turn bolstering the case for higher benchmark rates.

“I’m keeping my forecast of a 25bp policy rate hike by BSP on 22 March, mainly as a response to rising inflation risks,” said Nomura economist Euben Paracuelles. “The BSP’s on-going communication challenge as a result of the surprise RRR cut only adds to the impetus to hike the policy rate sooner rather later, if BSP were to cement its inflation-fighting credentials.”

Keeping prices stable is the central bank’s main mandate.

Trinh D. Nguyen, senior economist at Natixis, said the BSP would be among the first central banks in Asia to raise rates following an expected US rate hike at the March 20-21 meeting of the Federal Reserve.

On the flipside, Ruben Carlo O. Asuncion of the Union Bank of the Philippines believes that the BSP will not tweak rates anytime soon, saying that the recent cut in bank reserves “signals their confidence in long-run inflation.”

The central bank expects full-year inflation to average 4.3%, settling above target and soaring from last year’s 3.2%.