Inflation seen stabilizing at 3.5% — FMIC, UA&P
INFLATION is expected to stabilize at around 3.5% until the third quarter, which, coupled with strong economic growth, will allow the central bank to keep policy rates on hold and provide some comfort for local investors.
In its latest issue of The Market Call, analysts from the First Metro Investment Corp. (FMIC) and the University of Asia & the Pacific said inflation is expected to remain broadly stable and within target over the coming months.
Inflation averaged 3.2% during the first quarter, with the monthly inflation reading trending higher since November. March saw consumer prices rise by 3.4%, the highest in over two years since a 3.7% reading in November 2014, according to data from the Philippine Statistics Authority.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. has said that inflation will likely keep rising during the months ahead, and will likely hit a peak sometime during the third quarter. Still, the full-year average is expected to remain within the 2-4% target band, with the latest estimate at 3.4%.
FMIC economists expect inflation to hold steady from April to June, with commodity prices expected to normalize.
“Inflation should stabilize at 3.5% in the next few months, bolstered by normalizing food prices and crude oil prices constantly threatened by abundant supply and oil awaiting to be tapped readily,” the FMIC report read.
“While headline inflation continues to accelerate, we see a cap reached at 3.5%, exclusive of the possible additional 0.4% that higher excise taxes on petroleum products may cause should the administration’s Tax Reform bill pass with little modification.”
Proposals to reduce personal income tax rates are pending before Congress, which comes with revenue-raising measures through higher tariffs on fuel and cars.
The manageable inflation environment also comes at a time of upbeat prospects for the domestic economy, with the analysts seeing first-quarter gross domestic product expanding between 6.5-7%.
Government spending also posted a 4% increase during the first two months of 2016, which is expected to pick up further as big-ticket infrastructure projects are rolled out.
The strong domestic economy will also allow the BSP to keep policy rates steady throughout the first semester, although a hike may be introduced later this year following a second “lift-off ” in the United States.
The stable inflation trajectory is also expected to make local investors to take more risks, following what appears to be an initial “overreaction” seen as the year opened that drove bond yields upward, coupled with developments in the United States.
“The success or failure of President [Donald J.] Trump to obtain the necessary funds to splurge on infrastructure spending, the border wall and tax cuts will likely determine the direction of US Treasury yields in Q2,” the report read.
“This and local funds exiting from BSP, and movements in local inflation rate would provide a slight downward bias for local bond yields, which however will depend more on further movements in the inflation rate.”
Rates obtained for peso- denominated debt securities have been rising over the past few auctions, with the Treasury choosing to reject some bids if the yields sought are higher than what the government is willing to pay.