Economists in BSP survey agree 2017 inflation at 3.4%

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Forecasts by economists surveyed by the central bank showed a 3.4 percent consensus on inflation for the year, citing upward pressures coming from weak peso, high global oil prices, tax reform, high electricity rates and higher government spending on infrastructure.

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The consensus matched the central bank forecast of an average 3.4 percent in 2017, the Bangko Sentral ng Pilipinas (BSP) said in a report released over the weekend, which also showed a high probability that inflation would stay within the 2 percent- to-4 percent government target for the year.

The 2017 forecast would be the fastest yearly average inflation rate in three years since it hit 4.1 percent in 2014.

The survey was done in March, according to the BSP First Quarter Inflation Report.

But the March forecast showed a faster inflation reading from 3 percent when a similar survey was done in December 2016, and matched the central bank’s latest estimate of 3.4 percent for 2017.

The report noted the peso weakened by 1.79 percent to P50:$1 on average in the first quarter from P49.11:$1 in the fourth quarter of 2016, and by 5.45 percent from P47.28:$1 in the first quarter of 2016, mainly due to these factors: the US Fed rate hike in March 2017, persistent political noise in Europe and strong US dollar requirements by domestic companies, according to the report.

The report noted the additional revenue collections once the tax reforms are in place would largely fund the key infrastructure and social spending programs, which could further boost the domestic economy and raise productive capacity.

With assumptions of sustained and more efficient investment spending as well as healthy macroeconomic fundamentals, the proposed measures could potentially provide demand pressures over the medium-term, it said.

Sustained increase in productive public investment and higher capital income from the gradual reduction in corporate income tax would have significant “crowding-in effect” on private investment, resulting in a beneficial cycle of higher investment and potential output. In terms of inflationary impact, higher consumption taxes, together with the demand stimulus from the fiscal reform program is expected to result in higher inflation, the central bank said.

“The increase in the mean inflation forecast also accounted for the possible occurrence of El Niño in the latter part of 2017 as well as transport fare hike as a result of higher oil prices,” according to the report.

Forecasts by the World Bank, International Monetary Fund and US Energy Information Administration (EIA) suggest that global crude prices could average close to $55.00 per barrel in 2017. These factors would outweigh the downside risks from a possible return to low global oil prices, slowdown in China’s economy and yuan devaluation, as well as risks of recession and deflation in Japan and the Eurozone, the BSP said.

“However, the outlook remains uncertain due to supply-side factors. Despite the relatively high compliance of OPEC members to their production targets, there is uncertainty on whether the member countries would renegotiate voluntary supply reductions in H2 2017” it said.

Higher production of US shale oil could limit price pressures this year and on the demand side, slower growth in China could temper global demand, it added.

Based on the probability distribution of the forecasts by 23 out of the 30 respondents, the survey noted an 88.6 percent chance that the average inflation will fall within the 2 percent-to-4 percent range.

For 2018, the economists gave a mean inflation forecast of 3.5 percent—higher than the 3 percent of the BSP—compared with 3.1 percent in the previous survey and.

Respondents to the survey were economists from Al-Amanah Islamic Bank, ANZ, Asia ING, Banco de Oro, Bangkok Bank, Bank of Commerce, Bank of China, Bank of the Philippine Islands, Barclays, Chinabank, Citibank, CTBC Bank, Deutsche Bank, Eastwest Bank, Global Source, IDEA, Land Bank of the Philippines, Maybank, Maybank-ATR KimEng, Metrobank, Multinational Investment Bank, Mizuho, Nomura, Philippine Equity Partners, Rizal Commercial Banking Corp., Robinsons Bank, Security Bank, Standard Chartered, UBS and Union Bank.

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