Analysts expect tighter BSP monetary stance in 2017
Philippine headline inflation hit 2.6 percent in December, posting the fastest acceleration in two years, although the full-year average at 1.8 percent remained below the government’s target for 2016.
The headline rate in December was only marginally higher than November’s 2.5 percent, but marked a big jump from 1.5 percent recorded in December 2015.
It was the fastest rate since December 2014, when inflation hit 2.7 percent.
The rise in consumer prices in December supported the forecast by the Bangko Sentral ng Pilipinas’ (BSP) for an average 1.8 percent for 2016, but faster than the 1.4 percent average recorded in 2015.
It also hit the lower end of the 2.6 percent to 2.8 percent range estimated for the month by private analysts polled earlier by The Manila Times.
Core inflation averaged 1.9 percent in 2016. Excluding food and energy prices, core inflation picked up to 2.5 percent from 2.4 percent in November and from 2.1 percent a year earlier.
Private analysts are now seeing a higher inflation average for 2017, which they said would prompt the BSP to tighten its monetary policy setting.
Holiday season, supply constraints
The National Economic and Development Authority (NEDA) traced the uptick in inflation last month to price increases triggered by the holiday season and constraints in the supply of some food items.
Food inflation for December inched up to 3.7 percent from 3.5 percent in November, and surged from 1.8 percent in December 2015. Meanwhile, non-food inflation for the month was pushed up by transport (1.9 percent from 0.5 percent in November) and recreation and culture (1.7 percent from 1.6 percent in November).
“The higher prices in transport commodity reflected the hike in international oil prices caused by oil-producing countries’ decision to cut oil production by almost 1.8 million barrels per day,” Socioeconomic Planning Secretary and NEDA Director General Ernesto Pernia said.
BSP seen tightening in 2017
Going forward, strong domestic demand is likely to drive inflation higher to an average 3.1 percent in 2017, ANZ Research economist Eugenia Victorino said in an outlook.
“We expect rising incomes to keep household spending robust. Fiscal spending on infrastructure outside of the National Capital Region will likely drive growth in investment,” she said.
Victorino said government efforts to create investment-led growth in the medium term will lead to a bigger increase in capital imports, further widening the deficit in goods trade.
With this, she reiterated that the BSP will be one of the first Asian central banks to tighten policy.
“In light of strong domestic demand, rising inflation outlook and the central bank’s 15 to 24 months of monetary policy transmission lag, we expect the BSP to resume tightening its policy stance by the third quarter,” she said.
ING Bank Manila senior economist Joey Cuyegkeng expects inflation to rise to the mid-point of the 2 percent to 4 percent inflation target range in the next six to nine months.
“Monetary policy rates are expected to, more or less, match the policy rate hikes in the US, which would keep differentials steady,” he said, noting that the BSP is expected to shift to measured tightening in 2017.
Cuyegkeng said the BSP may need to balance the liquidity requirements of the economy against rising inflation and inflation expectations.
“We expect the BSP to raise policy rates by 25 basis points twice in 2017—a hike in late second quarter or early third quarter, and another hike in the fourth quarter.
Meanwhile, investment bank First Metro Investments Corp. is seeing inflation rising moderately to between 2.8 percent and 3.2 percent on an expected rebound in oil prices, strong domestic demand and a weaker peso.
BSP Governor Amando Tetangco Jr. said inflation prints in December came in as expected, or within the central bank’s 2 percent to 4 percent target over the balance of the policy horizon.
“We will continue to monitor global and domestic financial market developments, shifts in global demand and supply commodities, changes in global growth prospects to see how these would impact the domestic inflation dynamics, and whether there will be any need to make adjustments to our policy levers,” he told reporters in a text message.
The BSP expects inflation to average 3.3 percent in 2017 before the rate moderates to 3 percent in 2018.
Scenario for 2017-2018
The NEDA said inflation expectations for 2017 and 2018 consider a scenario of higher oil prices, pending petitions for adjustments in electricity rates, but especially, strong domestic economic activity.
“The inflation outlook is supported by the country’s brisk domestic demand conditions, buoyed by solid private household spending, higher government expenditure and adequate domestic liquidity,” Pernia said.
Pernia also noted that damage to rice caused by typhoons Karen, Lawin, and Nina could speed up the rise in consumer prices further in early 2017. Rice comprises a sizeable portion of the consumer price index basket.
“Volatility in rice prices could affect the overall welfare of the Filipino families, particularly the poor who spend around 20 percent of their incomes on rice. Therefore, the government needs to promote more resilient practices for rice production to minimize the impact of climate-related shocks,” Pernia added.