Monetary authorities must keep a close watch on inflation as the Philippines paces up to join Asia’s star economic performers because of its strong macroeconomic fundamentals, banking giant HSBC said on Tuesday.
In a research note titled “The Flying Dutchman, the Philippines: Life in the fast lane,” the bank said the country continues to perform well despite the destruction caused by Super Typhoon Yolanda.
HSBC notes the Philippine economy’s strength: a current account surplus; lower than budgeted fiscal deficit; increasingly favorable demographics; robust private consumption; ample liquidity, low interest rates; and a steady inflow of remittances.
The bank also said that what really stood out was the gradual acceleration of fixed investment in the country, which rose 11.7 percent in 2013 from 10.4 percent in 2012.
“This is the single most positive sign of renewed confidence, as investment has historically been lackluster relative to what’s needed to keep up with demand,” it stated.
Despite this, HSBC warned that the one area to keep an eye on is inflation, particularly imported inflation—a consequence of a weaker peso and short-term supply shortages that maintain upward pressure on food and housing costs, which means headline inflation could creep higher.
“The recent hike in electricity rates, coupled with a potential increase in rail prices, is also likely to lift inflation,” it said, referring to the possible increase in fares of the Light Rail Transit Lines 1 and 2, and the Metro Rail Transit Line 3.
The Bangko Sentral ng Pilipi–nas (BSP) earlier said it expects higher inflation this year, but gave no clue if a policy tightening is on the horizon. It also estimated inflation in February to be in the 3.8 percent to 4.6 percent range, based on upward pressure from higher petroleum and rice prices.
However, HSBC said the central bank still has room to support growth amid rising inflation.
“We expect rates to stay on hold at the upcoming meeting, including the SDA [special deposit account]rate,” it said, referring to the second Monetary Board (MB) meeting, scheduled for March 27.
In its February 6 meeting, the MB kept its benchmark interest rates unchanged after it determined that the inflation environment remains benign. The interest rate for overnight borrowing or reverse repurchase facility was kept at 3.5 percent, while the overnight lending or repurchase facility was also retained at 5.5 percent.