Analysts estimate headline inflation in July likely stayed steady from the preceding month at an average 2.8 percent, with higher rates for fuel and electricity and a weaker peso offset by lower food prices.
Forecasts for July made by eight analysts polled by The Manila Times ranged from 2.7 percent to 3 percent.
The comparative inflation in June stood at 2.8 percent.
All eight analysts expect July inflation will far exceed the year-earlier rate of 1.9 percent, given that the rise in consumer prices this year had so far been consistently faster than last year.
The central bank, however, had said headline inflation may have peaked for this year when the rate rose to 3.4 percent in March and April – the highest in more than two years, since it hit 3.7 percent in November 2014. In May 2017, the rise in consumer prices was recorded at 3.1 percent.
The Philippine Statistics Authority is expected to release July inflation data on Friday, August 4.
For full-year 2017, the BSP has set an inflation target range of 2 percent to 4 percent.
Mixed price movements
Three of the analysts – those from Australia’s ANZ Research, Metropolitan Bank & Trust Co. (Metrobank) Research, and Dutch financial institution ING Bank Manila – believe inflation kept its pace at 2.8 percent in July.
“There have been upward adjustments to electricity tariffs over the month. Meanwhile, global oil prices have consolidated,” ANZ Research economist Eugenia Victorino said.
The country’s largest power distribution utility, Manila Electric Co. (Meralco), raised its rate for the typical household by P0.0761 centavos per kilowatt hour (kWh) in July. As a result, the overall rate rose to P8.25 per kWh from June’s P8.17 per kWh.
Meralco said the slight rate increase translated to a P16 rise in the total bill for a typical residential household consuming 200 kWh a month; P24 for those using 300 kWh; P32 for 400 kWh and P40 for 500 kWh.
Metrobank Research head Marc Bautista said his inflation forecast for July was based on the mixed movement of prices in the basket of goods measured during the month.
“There was a general decrease in the prices of rice, some fruits and vegetables. However, there were increases in the prices of beef, pork and chicken. Gasoline prices were also low for the month,” he explained.
Metrobank does not expect any changes to the Bangko Sentral policy rate this year, versus its previous view that interest rates would be raised twice this year.
ING Bank Manila senior economist Joey Cuyegkeng said moderate inflation is likely to continue and will support a steady monetary policy bias in the very near term.
“There is no compelling reason to change the current monetary policy settings, with economic activity indicators pointing to sustained expansion. Guarding against significant Philippine peso weakness that may feed into inflation pressures, together with a continued tightening of US monetary policy, may require some response, especially with tax-related inflation pressures,” Cuyegkeng added.
Highest estimate 3%, possible rate hike
Land Bank of the Philippines (LandBank) gave the highest estimate of 3 percent for July inflation, up from 2.8 percent in June, due to what its analysts saw as the combined effect of higher crude oil costs and a weaker peso.
The state-run lender also expects changes to the Bangko Sentral policy settings soon.
“Oil prices increased by 12 percent year-on-year in July after falling by 6 percent in the prior month. The peso, meanwhile, weakened during the month by 8 percent from a year ago following June’s 7 percent depreciation,” said LandBank market economist Guian Angelo Dumalagan.
The two factors likely pushed up the cost of transportation and other utilities, he said.
Dumalagan added that the projected uptick in headline inflation bolstered the likelihood of another interest rate hike by the central bank this year.
“The BSP rate increase might occur in the fourth quarter in parallel w ith the possible rate adjustment by the US Federal Reserve,” he said.
The central bank—after lowering its reverse repurchase rate to 3 percent from 4 percent on May 16 last year in the runup to adopting an interest rate corridor system on June 3, 2016— kept its key policy rate unchanged at its June 22, 2017 meeting.
Except for LandBank, the rest of the interviewed analysts expect the BSP’s monetary board to maintain its current policy settings.
BSP’s balancing act
Analysts from Singapore-based bank DBS and the Philippines’ Banco de Oro Unibank Inc. expect a mild increase in inflation to 2.9 percent in July.
“Given the current inflation picture, it does look like there is now less pressure on the central bank to act on rates. Nonetheless, the key factor that may push the BSP to hike rates remains prevalent,” said DBS economist Gundy Cahyadi.
Cahyadi explained that markets currently seem to be complacent toward the United States Federal Reserve’s rate trajectory going into 2018 and 2019.
However, he warned that any shift in market expectations could put upward pressure on global rates, and might also lead to a new bout of volatility in the markets,
“This is something that the BSP may want to avoid, especially considering the peso looks relatively weak compared with its neighboring counterparts,” he added.
The DBS economist credits the Bangko Sentral for having managed to create room for flexibility in its monetary policy – either for keeping its rates steady for now or raising its rates up to two times during the coming months.
“Double-digit investment growth and a pretty stable consumption growth will continue to lead overall GDP [gross domestic product]growth exceeding the 6 percent mark. With fiscal policy set to remain on an expansionary mode, the BSP may choose to play the balancing act,” he said.
Lowest estimate at 2.7%
BDO market strategist Jonathan Ravelas did not elaborate on his 2.9 percent inflation forecast but said, “most likely the BSP will keep rates unchanged.”
IHS Markit and Bank of the Philippines Islands (BPI) provided the lowest estimate of 2.7 percent for July inflation.
Rajiv Biswas, Asia Pacific chief economist for IHS Markit, said inflation pressures may have been constrained in July, especially under relatively stable world oil prices.
“Some modest increases in retail petrol prices were implemented in the Philippines in July, as well as a slight uptick in electricity prices. Some further depreciation of the peso against the US dollar during July also contributed to higher import prices, notably for key imports such as petroleum products and natural gas,” he explained.
With headline inflation hovering around the mid-point of the central bank’s target range, Biswas said the monetary authority is expected to keep monetary policy settings on hold in the near term.
Biswas acknowledges the possibility of a tightening bias by the Bangko Sentral if domestic economic growth and credit expansion continue to gain momentum.
“While the US Fed is expected to hike policy rates once more in 2017, the BSP’s own monetary policy decision will focus on trends in domestic inflation and GDP growth momentum in the Philippines, rather than the US Fed policy moves,” he added.
BPI Vice President and lead economist Emilio Neri Jr. did not elaborate on his inflation forecast of 2.7 percent but said: “Low inflation means the peso depreciation has manageable impact on the prices of goods and services and, therefore, no need to sacrifice our foreign reserves.”
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