July inflation seen at 4.1 – 4.9%, near target ceiling
The central bank indicated a firm hawkish stance on the eve of today’s Monetary Board meeting, assuring the markets and the general public of its readiness to implement policies to ward off any further upward pressures on consumer prices to keep them stable.
Although insisting that inflation will remain within the full-year target of 3 percent to 5 percent, the Bangko Sentral ng Pilipinas (BSP) announced a July forecast band that stood near the upper end of that range for the month of July.
“July inflation is projected to settle within 4.1 percent to 4.9 percent,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Wednesday.
The BSP said earlier the baseline inflation path has shifted upward mainly due to the higher price outturn in May, as well as the inclusion of the potential impact of El Niño on food and utility prices.
Tetangco said the BSP will continue to closely monitor price trends and their implications for future inflation.
“The BSP stands ready to implement polices to keep inflation expectations well-anchored and protect the government’s inflation targets,” he said.
But Tetangco added that the decline in the prices of some agricultural products and reduction in petrol prices could partly offset the upside pressures.
The monthly headline inflation rate in May climbed to 4.5 percent, its highest level since November 2011, but retreated slightly to 4.4 percent in June.
BSP to raise key rates by 25 bps – analysts
Analysts polled by The Manila Times said on Wednesday they believe that today will be the start of a tightening cycle of the Bangko Sentral ng Pilipinas (BSP) amid the inflationary impact of the recent Typhoon Glenda and second-round inflation effects caused by the energy crisis.
The analysts predict the BSP may implement a 25-basis point (bps) hike on its benchmark interest rates on overnight borrowing and lending facilities to maintain the country’s financial stability.
“We expect the BSP to hike the policy rate by 25 bps to 3.75 percent at its meeting on 31 July,” Jeff Ng, economist at the Standard Chartered Bank, said.
Ng pointed out that recent inflation turnouts (4.5 percent in May and 4.4 percent in June) trended toward the top end of the central bank’s inflation target of 3 percent to 5 percent for the year, led by food inflation, particularly higher rice and vegetable prices.
“The impact of the recent typhoon is also likely to pose upside risks to inflation,” he said.
Sharing the same view, analysts at the Bank of the Philippine Islands (BPI) also expect the Bangko Sentral to adjust its key policy rates.
BPI’s lead economist Emilio Neri Jr. and associate economist Nicholas Antonio Mapa both said the central bank may adjust its policy rates on RRP (reverse repurchase facility) and RP (repurchase facility) by 25 bps in order to get a handle on inflation expectations, “which in many respects are more key to the BSP’s conduct of inflation targeting than actual inflation.”
“We’ve seen prices for food items such as rice and other consumable spike in recent months. Although these can be argued to be supply-side induced, the prolonged prints closer to the upper-end of the BSP inflation target have tilted the inflation path to the upside,” Mapa said.
Asked if they expect the BSP to determine first Typhoon Glenda’s impact on July inflation before factoring that in today’s policy decision, Neri said: “The BSP may not be able to wait for July inflation before they act on rising prices. Glenda may very well have caused further acceleration in the price uptrend. We think the BSP would rather err on the side of caution given its mandate.”
Headline inflation for the first quarter was reported at 4.1 percent, up from 3.4 percent in the first quarter of 2013.
“Skewing the inflation path to the upside raises the possibility of the emergence of second-round effects emanating from the potential protracted period of inflation at above the 4-percent levels, as the government failed to enact a timely importation of rice to make up for our shortage and deal with crop pests that have damaged our other key crops,” Mapa added.
At the same time, Mapa also warned that the looming energy crisis may foment possible second-round effects, which could result in more transport fare hikes and perhaps, even wage adjustments.
Taking a conservative outlook, Justino Calaycay, analyst at the Accord Capital Equities Corp. said that the Monetary Board may not implement any policy or macroprudential measures at present, due to the timing of the releases of key data about gross domestic product (GDP) and inflation.
“It is our view that the BSP-MB will hold in abeyance any policy changes at this time. First, the two main data entries, GDP and inflation come after the meeting. Of course they already have estimates for these but the actual numbers are still a month and a week away, respectively,” he said.
Calaycay also believes that the economy has been able to rise above the disappointing 5.7 percent GDP growth rate of the first quarter while inflation remains “pretty stable” around the 4-percent mark.
“Unless surprises from either of these ends are in the offing, there is little reason for the rates to be moved in either direction. Having said this, the BSP will keep its forward guidance that it will stand ready to make adjustments as it closely monitors movements in consumer prices and the levels of liquidity in the market,” he stated.
In terms of macroprudential measures the analysts said the BSP is likely to maintain the interest rate on special deposit account (SDA) at 2.25 percent and the reserve requirement ratio (RRR) at 20 percent as it still evaluates the impact of recent hikes before making further changes.
The BSP’s Monetary Board adjusted the RRR in its meetings on March 27 and May 8, raising the ratio by a percent each time. In its June 19 meeting, despite analyst expectations of a benchmark rate hike, the policy-setting body kept its key rate unchanged but increased the rate on the SDA facility by 25 basis points to 2.25 percent.