Monetary policy likely steady despite 3-year-high Oct. inflation

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INFLATION picked up further in October to its fastest pace in nearly three years, but is unlikely to prod the Bangko Sentral ng Pilipinas (BSP) to raise borrowing rates just yet since the pace remains within expectation.

Prices of widely used goods and services increased by 3.5% from a year ago, inching up from September’s 3.4% climb and October 2016’s 2.3% annualized pace.

October’s inflation rate falls within the 3.2-3.7% estimate of the central bank, matched the 3.5% median in a BusinessWorld poll last week, and is the fastest monthly reading since November 2014’s 3.7%.

Core inflation, which excludes food and energy items that are subject to volatile price swings, eased to 3.2% last month from September’s 3.3% but was still faster than the year-ago 2.3%.

October’s pace brought year-to-date inflation to 3.2% — matching the BSP’s own forecast average for the entire 2017.

“The BSP expects inflation to remain manageable over the policy horizon after taking into account the latest assessment of price levels in October,” BSP Governor Nestor A. Espenilla, Jr. told reporters via text. “Firm domestic economic activity, ample liquidity, and well-anchored inflation expectations continue to support within-target inflation.”

Broken down, October data released by the Philippine Statistics Authority (PSA) yesterday show higher increments in the sub-indices of alcoholic beverages and tobacco (6.8% from preceding month’s 6.4%); housing, water, electricity gas and other fuels (4.0% from 3.8%); restaurants and miscellaneous goods and services (2.6% from 2.4%); recreation and culture (1.5% from 1.4%); and communication (0.4% from 0.3%).

Economists attributed the uptick in consumer prices to the rise in oil prices, depreciation of the peso against the US dollar and the food price increase as bad weather crimped supply.

“Oil is an input to the production of many consumer goods. Hence, a rise in oil prices would have a significant impact to overall inflation,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines. “Aggravating the impact of rising oil prices is the weakening of the peso, which makes imported products, including oil, more expensive in local currency terms.”

Fuel pump prices rose in October to reflect higher world crude prices while electricity and water concessionaires introduced higher charges that took effect last month.

Meanwhile, the peso depreciated against the dollar, averaging P51.3433 for the month and touching a fresh 11-year-trough at P51.77.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, said that food prices and alcoholic beverages consistently contributed to the marginal increment in prices.

“It must be noted that core inflation has actually come down,” he said.

Food inflation picked up by 3.8% from 3.7% of the preceding month and 3.5% in October 2016, fueled by faster price increases in 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 M. Pernia said in a statement of the National Economic and Development Authority (NEDA), which he heads as director-general.

The Department of Agriculture is set to lift in November a four-month ban on Brazilian meat and meat products that was imposed after salmonella was found in some shipments. Import of Brazilian meat account for around six percent of the country’s inbound meat shipments.

Non-food inflation inched 3.2% higher in October from the previous month’s 3.1% and last year’s 1.5%.

“One of the reasons is the surge of domestic prices for liquefied petroleum gas (26%), as well as diesel (22.8%) and kerosene (13.2%) in October 2017,” NEDA said in its statement.

Looking ahead, Mr. Pernia said that “[u]pbeat consumer spending this holiday season is also expected to push prices up,” adding that “[w]ithin the near term, higher utility rates, increasing domestic fuel prices and the depreciation of the peso may further exert upward pressures on inflation.”

For Landbank’s Mr. Dumalagan, inflation “might average close to 3.2% for this year, as consumer prices might rise by at least 3.3% in the last two months of 2017,” with higher oil prices and a weaker peso continuing to drive prices up.

Union Bank’s Mr. Asuncion noted that year-to-date inflation “is also in line with the BSP’s expectations”, hence showing that the overall price increase “is certainly manageable at this point.”

Analysts at Nomura Global Research said they see inflation sustaining an uptrend for the rest of 2017 on the back of rising world crude prices, even expecting a fresh peak of 3.7% between November and December.

“We still expect BSP to leave its policy rates unchanged at this Thursday’s meeting and indeed for the rest of the year, given that inflation still looks likely to remain within its 2-4% target range for 2017,” Nomura economists said, noting that two rate hikes may instead be introduced during the second half of 2018.

ANZ Research economists noted that rising fuel prices could likewise lead to higher transport costs in the months ahead, coupled with stronger demand that could push prices further upward. They expect the BSP to introduce two rate increases in 2018’s first quarter. — Melissa Luz T. Lopez with Arianne Kristel R. Pelagio



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