But analysts split on forecasts for BSP monetary policy move
The fastest inflation rate in more than two years, hit at 2.7 percent in January this year, has affirmed the official government forecast and a consensus view by analysts for 2017 that inflation will be higher this year than in 2016.
At the same time, it also split analyst views on whether the central bank would tighten its monetary policy this year.
The Bangko Sentral ng Pilipinas (BSP) itself expects inflation to average 3.3 percent in 2017 before the rate moderates to 3 percent in 2018.
BSP Deputy Governor Diwa Guinigundo said the central bank already factored in higher oil prices and the impact of the government’s tax reform on its inflation forecast for this year and 2018.
For its part, the National Economic and Development Authority said despite upside risks and pressures, the government expects inflation to be stable and remain consistent with the official target range.
Standard Chartered Bank economist Chidu Narayanan sees the January inflation print in line with the bank’s view that inflation will not be a major concern for the BSP this year, and that the central bank will keep policy rates on hold through 2017.
“We expect inflation to be higher this year due to the combination of low-base effect, higher commodity prices and also some domestic inflationary pressures. However, we do not think the increase will be significant enough to cause the BSP to hike rates this year,” he said.
Seeing the January inflation data from a different perspective, however, ANZ Research economist Eugenia Victorino believes demand-pull price pressures are likely to drive inflation higher by the first half of 2017, which would prompt the BSP to hike its interest rate by the third quarter of the year.
“Demand-pull price pressures will add on to cost-push forces. Considering the current trajectory of commodity prices, we expect the effect of low base comparisons to peak in the first half. Yet, strong domestic demand will likely persist,” she said.
She noted that rising incomes have been keeping growth in household consumption well above its long-term average of 4.8 percent.
Government spending will boost domestic demand further, Victorino said.
“With public spending expected to focus on infrastructure development away from its traditional concentration on the NCR [National Capital Region], the marginal effect on growth will likely be significant. Combined with strong household spending, this could push core inflation higher,” she added.
Given this, the ANZ economist said the BSP will be one of the first Asian central banks to tighten monetary policy in 2017.
“Assuming headline inflation will peak in the first half, we still expect average inflation this year to fall in the upper half of the 2 percent to 4 percent target range of the BSP. With strong domestic demand, we expect an interest rate hike in the third quarter,” she said.