• Inflation settles at 2-yr high 3.4% in April

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    HEADLINE inflation settled at a two-year high of 3.4 percent in April on the back of slower price adjustments in electricity and gas and slightly higher prices of food commodities, Philippine Statistics Authority data showed on Friday.

    It was the fastest since November 2014, when inflation registered at 3.7 percent, surpassing the first two-year high of 3.3 percent in February.

    The central bank said the steady inflation rate confirmed the manageable inflation outlook for the year.
    An analyst, on the other hand, said that demand-pull price pressures are becoming more entrenched and inflation expectations are likely to rise as debates on the first package of tax reforms get underway. This would probably prompt the Bangko Sentral ng Pilipinas (BSP) to raise the policy rate by a cumulative 50 basis points (bps) this year and 75 bps in 2018.

    The consumer price index (CPI) in April accelerated from 1.1 percent a year earlier but was unchanged from March 2017.

    The inflation rate last month matched the average forecast of six analysts polled by The Manila Times, ranging from 3.3 percent to 3.7 percent. It is also within the BSP forecast of 3 percent to 3.8 percent, bringing the year-to-date average to 3.2 percent, or within the government’s target of 2 percent to 4 percent.

    Respite

    The National Economic and Development Authority (NEDA) said the stable inflation rate in April is a respite from the upward inflation trend in the first three months of the year.

    “Nevertheless, volatilities in oil prices and erratic exchange rates can still manifest into higher domestic prices for both food and non-food commodities,” NEDA Officer in Charge and Undersecretary for Investment Programming Rolando Tungpalan said in a separate statement.

    Inflation in the non-food group decelerated to 2.7 percent in April 2017 from 2.8 percent in March. Slower inflation in this group can be attributed to the sluggish price adjustments of electricity, gas and other fuels after the Malampaya Gas Field resumed operations after a two-month maintenance shutdown from January to February 2017, according to NEDA.

    Lower pump prices of diesel, gasoline, kerosene and liquefied petroleum gas contributed to slower non-food inflation, it added.

    Inflation in the food and non-alcoholic beverage group accelerated to 4.2 percent in April from 4 percent in March. Partially tempering the increase in food inflation were fruits, vegetables, sugar, jam, honey, chocolate and confectionery, NEDA noted.

    Prices of rice, meat and fish remained high due to supply constraints, it said, citing data from the PSA that showed a declining inventory of commercial rice and in warehouses of the National Food Authority.

    Manageable outlook

    “The numbers confirm the manageable inflation outlook for the year,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. told reporters in a text message.

    At the moment, the BSP deems its policy settings to be appropriate, Tetangco said.

    “[B]ut we continue to monitor changes in commodity prices, particularly petroleum products as well as petitions for utility rate increases, which we see are possible risk factors to our baseline scenario,” he added.

    Since lowering the reverse repurchase rate to 3 percent from 4 percent in the run-up to adopting an interest rate corridor system on June 3, 2016, the central bank has kept the policy rate unchanged.

    The Monetary Board (MB) has kept the corresponding rates for overnight lending and deposit facilities steady at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratio was also left unchanged at 20 percent.

    Upside risks

    ANZ Research economist Eugenia Victorino said the underlying price pressures are strong despite a steady print in April’s headline inflation at 3.4 percent,.

    “Monthly gains in food and transport prices contributed significantly to the overall annual change. However, more important is that core inflation has continued to firm up, rising 3 percent year-on-year during the month,” she said.

    Victorino said risks to headline inflation remain tilted on the upside.

    “As it is, inflation has been in the upper half of the central bank’s 2 percent to 4 percent target range for the past three months. Even if the contribution of transport prices to overall inflation starts to fade in the coming months, strong domestic demand will continue to exert upward pressure on headline inflation,” she said.

    The economist said progress on the first package of tax reforms is also likely to raise inflation expectations.

    Government estimates that headline inflation could accelerate by another 1.5 percentage points within the first 12 months of implementation of reforms, posing a threat to the central bank’s inflation target.

    “Thus, we stand by our view that the BSP will commence its tightening cycle in the third quarter and raise its policy rate by a cumulative 50 bps in 2017 and 75 bps in 2018,” she said.

    NEDA said possible increases in transportation fares and electricity rates in the coming months could also exert upward pressure on prices, along with the transitory impact of the proposed tax reform program.

    On a positive note, normal rainfall pattern and neutral weather conditions expected from March to August 2017 bode well for the crops sector, it said.

    “With the potential recurrence of El Niño, the government should start taking precautionary actions to mitigate the damaging effects of droughts and dry spells. These include production support, distribution of seeds, and timely importation,” said Tungpalan.

    He urged the government to prioritize discussions on rice tariffication to avoid creating policy uncertainties.
    “Additional interventions should also be taken to address those who will be negatively affected by the expected increase of rice imports,” added Tungpalan.

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