Oct inflation rises to 3-yr high of 3.5%

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Inflation rose to a three-year high of 3.5 percent in October, the government reported on Tuesday.

The result, attributed to higher food and fuel prices, picked up from September’s 3.4 percent and the 2.3 percent recorded a year earlier. It brought year-to-date inflation to 3.2 percent, above the midpoint of the government’s 2 percent to 4 percent target.

The Department of Finance accurately predicted the outcome while the Bangko Sentral ng Pilipinas had a 3.2 percent to 3.7 percent estimate for the month.

The last time the country’s inflation rate exceeded 3.5 percent was in November 2014 when it hit 3.7 percent.

Higher food, fuel prices


Faster price adjustments in food and fuel caused inflation to accelerate in October, the National Economic and Development Authority (NEDA) said.

Citing Philippine Statistics Authority (PSA) data, the agency said inflation for the food subgroup rose to to 3.8 percent from 3.7 percent in the previous month due to faster price increases for corn, meat and vegetables.

“Higher prices for corn and vegetables may be traced still to the lingering effects of typhoon Jolina, tropical depression Maring and typhoon Paolo. On the other hand, higher prices of meat can be attributed to the import ban on Brazilian meat products, affecting domestic meat production costs,” Socioeconomic Planning Secretary Ernesto Pernia said in a statement.

Non-food inflation, meanwhile, reached 3.2 percent in October from 3.1 percent in the previous month and 1.5 percent a year earlier.

One of the reasons was a price surge for liquefied petroleum gas (26 percent) as well as diesel (22.8 percent) and kerosene (13.2 percent), the NEDA said.

Core inflation, which strips out volatile food and fuel prices, was also lower in October, falling to 3.2 percent
from 3.3 percent the previous month and 2.3 percent a year earlier.

Year-to-date core inflation settled at 2.9 percent, the PSA said.

Still manageable

In a comment, the Bangko Sentral said it expected inflation to remain manageable over the policy horizon after taking October price levels into account.

“Inflation is projected to settle near the midpoint of the national government’s target range of 3.0 percent ± 1.0 percentage point in 2017 to 2019,” central bank Governor Nestor Espenilla Jr. said.

Firm domestic economic activity, ample liquidity and well-anchored inflation expectations continue to support within-target inflation, he added.

“Looking ahead, the BSP will remain vigilant against any risks to the inflation outlook to ensure that the monetary policy stance remains consistent with the mandate of preserving price stability conducive to economic growth,” Espenilla said.

The NEDA also expects full-year inflation to stay within the target but added that upside risks would become more prominent as the holiday season approached.

“This warrants close monitoring of the rising prices in domestic petroleum as well as utility rates,” Pernia said.
He said the government needed to be consistently on the watch for climate developments considering that weather patterns and events have a direct impact on food supply and prices.

“We must also ensure a stable and sufficient level of the country’s rice stock. This is an important policy concern given that rice comprises a sizable portion of the CPI [consumer price index]basket,” Pernia said,
“Deciding the appropriate timing of rice importation is vital to avoid supply disruptions. There is also a need to amend domestic laws to end the quantitative restrictions on rice.”

The NEDA chief said crude oil prices could also increase in the near-term due to a continued rise in global oil demand.

Based on the October 2017 Commodity Markets Outlook report of the World Bank Group, energy prices are projected to rise by 4 percent in 2018.

No rate hike

Some international financial institutions said the Monetary Board was likely to maintain the central bank’s key interest rates during a policy meeting thisThursday.

ING Bank said a mildly higher inflation report was unlikely to result in tighter monetary policy this week or during the next meeting in December.

“BSP acknowledges upside inflation risks for the rest of this year and for 2018. Despite these risks, BSP forecasts average annual inflation of 3.2 percent from 2017 to 2019,” ING Bank Manila senior economist Joey Cuyegkeng said.

“We are less optimistic with our forecast acceleration to 3.7 percent in 2018 and somewhat moderate to 3.6 percent in 2019,” he noted.

Cuyegkeng added that the central bank’s inflation outlook over the policy horizon supported steady policy settings, at least in the very near term.

“However, market expects some tightening in 2018. We are with the consensus view of a 50bps (basis points) hike in 2018,” he said.

HSBC, meanwhile, also expects monetary authorities to keep the reverse repo rate steady at 3 percent on Thursday but added that the focus should be on the reserve requirement ratio (RRR).

“This time it’s [a bit]different: We’re focused on something else for the upcoming BSP meeting: the RRR. We’ve repeatedly noted that the BSP’s most likely next move would be a 100bp cut to the RRR,” it said.

The bank explained that recent events suggest the Bangko Sentral was starting to move in that direction: Espenilla’s pronouncement that that he would like to see the RRR cut down to “single-digit,” market conditions and recent reforms.

“We expect a RRR cut to be on the table from this meeting onwards, with at least one cut delivered by the end of first quarter 2018,” it said.

“We believe that a RRR cut at the November meeting would actually be timely, but even if the BSP doesn’t cut this time, it has already laid the groundwork for a RRR cut in the foreseeable future.”

The RRR is the proportion of current deposits that banks need to keep with the central bank against the sum that they can loan out to borrowers.

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