Feb inflation seen faster at 2.7-3.4%


HIGHER food and oil prices amid a weak peso likely fueled headline inflation at a faster pace in February, the result of which would likely pressure the central bank to impose tighter monetary policy, according to most analysts polled by The Manila Times.

Ten analysts said February inflation could have settled within the 2.7 percent to 3.4 percent range, with the aver-age estimate at 3.2 percent.

In January, inflation accelerated to 2.7 percent from 2.6 percent in December 2016. In February 2016, inflation set-tled at 0.9 percent.

The analyst estimates, however, stand near the lower end of the 3.1 percent to 3.9 percent range considered by the Bangko Sentral ng Pilipinas (BSP).

The Philippine Statistics Authority is expected to release the February 2017 inflation report on Tuesday.

From the highest
German lender Deutsche Bank, state-owned Land Bank of the Philippines and IHS Markit gave the highest esti-mate of 3.4 percent, seeing the impact of food and crude oil prices and electricity rates on the consumer price in-dex.

Diana del Rosario, economist at Deutsche Bank, noted the impact of food and crude oil prices and electricity rates on headline inflation.

“But with inflation readings in the first half of this year also bloated by a low base from last year, we do not expect the BSP to tweak the policy rate in the coming months,” del Rosario said.

Guian Angelo Dumalagan, market economist at Land Bank of the Philippines, said oil prices and the peso’s depreci-ation could have a big impact on consumer prices.

“These two major factors are the underlying reasons behind the hike in transportation cost and the increase in the generation charge component of Meralco’s (Manila Electric Co.) electricity bill,” he said.

The Philippine peso hit P50:$1 for the first time this year on February 18 and has since stayed beyond that psycho-logically important level.

The Land Transportation and Franchising Regulatory Board also approved a P1 peso increase in the base fare of jeepney commuters to P8 last month, while Meralco raised by P0.92 per kilowatt-hour (kWh) the electricity bills of typical households consuming 200 kWh a month and brought the February rate to P9.09 per kWh.

Dumalagan associated faster inflation to a global trend of accelerating prices, which commenced after major oil producers agreed to limit output and stabilize crude prices in December.

The Land Bank economist said the BSP may not yet increase its key interest rates as core inflation remains modest across the board and likely below the mid-point of the BSP’s inflation target.

“Moreover, the steady decline in the average yields of the two tenors of the BSP’s term deposit facility in the past few weeks could mean that hiking policy rates might not yet be the BSP’s immediate priority. Given current devel-opments, a mid-year adjustment in BSP’s policy settings is more probable,” he added.

Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, said the inflation rate last month could be the fastest year-on-year acceleration since November 2014, when inflation hit 3.7 percent.

“With world oil prices having steadily risen since January 2016, this has gradually pushed up retail petrol prices and electricity prices, adding to inflationary pressures,” he said.

With the inflation rate expected to move into the upper range of the BSP’s inflation target, Biswas sees the BSP getting increasingly concerned about inflationary pressures given the depreciation of the peso against the US dol-lar in late 2016 and early 2017.

“With the US Fed expected to hike US interest rates three more times in 2017, with the next US rate hike possibly as early as the Federal Open Market Committee meeting on 14 to 15 March, Asian central banks will be concerned about potential currency markets turbulence with the USD likely to appreciate against many emerging markets cur-rencies,” he said.

The BSP is expected to begin tightening monetary policy later this year, due to the upturn in headline inflation in the face of strong economic growth and the impact of peso depreciation on import prices, Biswas added.

BDO Unibank Inc., Natixis and Metrobank Research pegged inflation at 3.3 percent.

Jonathan Ravelas, market strategist at BDO, said a 3.3 percent inflation rate in February “could push the BSP to raise its benchmark rate” during its March 23 monetary policy meeting.

Natixis senior economist Trinh Nguyen said higher oil prices and strong demand will continue to push headline in-flation higher. “We expect an unfavorable base and a small pickup of month-on-month increase to push headline to 3.3 percent year-on-year,” she said.

Nguyen said the BSP is likely to adopt a more hawkish tone, although inflation within the 2 percent 4 percent target would still be comfortable. “We expect the BSP to hike rates in the second half of 2017 to follow the Fed. The peso is expected to depreciate further on higher import costs and a stronger dollar,” she added.

Inflation rate could have picked up amid an increase in prices of food items and petroleum products, Metrobank Research analyst Pauline Revillas.

On the other hand, ANZ research economist Eugenia Victorino sees inflation at 3.2 percent as transport prices con-tinued to contribute positively to the gains in headline prices in line with the regional trend.

“Meanwhile, we expect utility prices to have increased on the back of higher electricity generation charges over the month,” she added.

Singapore’s DBS and the UK’s Barclays placed their estimates at 3 percent.

The current trend is clearly tilted towards the upside, but inflation hitting the ceiling of the target of the BSP is still unlikely at this point barring any oil price shock until 2019, said Gundy Cahyadi, economist at DBS. “Which means that the central bank is unlikely to panic over inflation risks in the near-term,” he said.

The BSP did highlight that inflationary risks remain tilted towards the upside, particularly given oil price move-ments. Cahyadi noted. “It is also interesting that the central bank seems fairly comfortable with recent peso movements and has, in fact, factored in possible (further) weakening of the currency,” he said.

“While previous comments from the central bank officials have suggested that the BSP won’t necessarily respond to any rate adjustment in the US, we reckon that a hike by the US Fed in March will embolden the BSP to kick-off its own policy normalization,” he added.

Rahul Bajoria, an economist at Barclays, noted headline inflation is likely to climb to the mid-point of BSP’s target.

The lowest estimate of 2.7 percent was given by London-based research consultancy Capital Economics. Inflation has by now probably peaked with fuel prices unlikely to go up any further and little sign that underlying inflationary pressures are increasing.

“Low inflation will give the central bank room to keep interest rates low over the coming year. Whereas the con-sensus is expecting rate hikes, we expect the key policy rate to be left unchanged throughout 2017 at 3 percent,” Gareth Leather, an economist at Capital Economics.

BSP Governor Amando Tetangco Jr. has noted there is nothing to be alarmed about the central bank’s 3.1 percent to 3.9 percent projection for February.

“The increase in domestic petroleum prices, jeepney and taxi fares and electricity rates of Meralco-serviced areas could exert upside pressures to inflation during the month. Nonetheless, the uptick in the projected inflation is seen to be temporary as upside pressures are largely supply-side in nature, Tetangco said.


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