Higher inflation rate by the third quarter of the year may push the Bangko Sentral ng Pilipinas (BSP) to hike its policy rates only in the second half of 2014, according to Standard Chartered Bank.
In a research report “Philippines—Weak correlation between PHP and CPI,” Standard Chartered economist Jeff Ng said that the inflation rate is likely to peak in the third quarter of the year, but remain below the upper end of the BSP’s 3-percent to 5-percent target band.
“We therefore expect policy rate hikes only in the third quarter and fourth quarter this year, by a total of 50bps [basis points]to 4 percent by end-2014,” he said.
Inflation rate is one of the factors that the central bank takes into account in its policy-setting mandate, which influence the rates that local banks charge on their loans.
The BSP has maintained its key policy rates since October 25, 2012, wherein it reduced the interest rate for the reverse repurchase facility from 3.75 percent to 3.5 percent, while overnight lending or repurchase facility was retained at 5.5 percent. Reserve requirement ratios were kept steady as well.
The central bank is seeing a higher inflation rate for 2014 at 4.5 percent, and 2015 at 3.2 percent, still within its 3-percent to 5-percent target band but higher compared to 2013’s average inflation rate of 3 percent.
Furthermore, Ng said that the bank maintained its inflation forecast of 3.9 percent for 2014 from 3 percent in 2013. Standard Chartered expects inflation to rise from 3.5 percent in the fourth quarter of 2013 to 3.9 percent in the first quarter of 2014, 4.2 percent in the second quarter, and 4.3 percent in the third quarter, before falling to 3.3 percent in the fourth quarter.
Peso weakness not inflationary
Meanwhile, the Standard Chartered economist said that commodity price fluctuations have a greater impact on inflation than the weak Philippine peso.
“The Philippine peso has been the worst-performing Asian currency relative to the US dollar so far in January, falling 1.86 percent year-to-date. However, we do not think this weakness will translate into domestic price pressures,” Ng said.
Standard Chartered also reported that the greatest impact of a weaker peso is likely to be on energy inflation, as Brent crude becomes more expensive in peso terms.
It noted that Brent and CRB food price changes appear to have a stronger positive correlation with the peso than pure foreign exchange fluctuations.
“Pure FX [foreign exchange]fluctuations alone do not appear to have led food and energy inflation. At the same time, domestic food inflation is decoupling from international food prices as the Philippines become more self-reliant in terms of rice and corn,” Ng said.
The economist added that in terms of overall headline inflation, changes in the local currency on a year-on-year basis have little impact on inflation.
“While we expect the Philippine peso to have some inflationary impact on the domestic economy, we do not see sufficient upside to cause the BSP any significant concern,” he said.