Consumer prices were seen trending up again early next year but that the Central Bank was likely to deliver several rate hikes during the period as a preemptive measure, the Manila unit of the Dutch financial services giant ING Group said.
In his most recent market commentaries, ING Bank economist Joey Cuyegkeng in Manila said inflation was likely to lift again and peak in the first half next year as the government implements the first package of the Comprehensive Tax Reform Program.
The country’s inflation peaked in March and April at 3.4 percent but subsequently decelerated to 2.8 percent in June.
Cuyegkeng estimates some 0.5 percentage point to 1 percentage point is added to the headline inflation once the reform is in place due to higher excise tax on oil products and on sweetened beverages, as well as to a prospectively wider value-added tax base.
“We expect inflation to increase to 3.5 percent to 3.7 percent in the first half of 2018. We have cut our 2017 average inflation forecast to 3 percent but retain our 3.5 percent average inflation forecast for 2018,” Cuyegkeng said.
Cuyegkeng’s forecasts for 2017 and 2018 are still within the official target range of 2 percent to 4 percent.
The Central Bank projected inflation averaging 3.1 percent this year and 3.0 percent next year.
But no matter the expected shift in inflation, the Bangko Sentral ng Pilipinas (BSP) was seen to deliver at least one more interest rate before the year ends.
“Monetary policy is likely to turn more hawkish from the fourth quarter of the year. We expect [the] BSP to hike policy rates in the fourth quarter by 25 basis points. In 2018 we expect a 50 basis-point hike,” Cuyegkeng said.
“The hike in the fourth quarter could be canceled with moderate inflationary pressures from the tax package. The Senate [will] evaluate the tax package when Congress resumes sessions [on] July 24. A more moderate excise-tax increase could mute the inflation impact of the package. We attach a relatively modest chance of this happening given the urgency to raise government revenues that would finance infrastructure spending and higher social expenditures,” he added.
At its last rate-setting meeting, the BSP kept the interest rate on its key lending or overnight reverse repurchase rate at 3 percent.
The corresponding interest rates on the overnight borrowing and deposit facilities were also kept steady. The reserve requirement ratios were similarly unchanged.
The BSP is expected to meet again to decide on the direction of monetary policy on August 10. This will be the first rate-setting meeting of the new governor, Nestor A. Espenilla Jr.