FMIC, UA&P cite need for another rate hike

MONTHLY INFLATION will likely ease next semester to return within target, but another rate hike from the central bank will be needed to keep overall price increases in check, according to an assessment released on Thursday.

Economists of the University of Asia & the Pacific (UA&P) and the First Metro Investment Corp. ( FMIC) said headline inflation will likely peak in June at the latest and will decelerate after the one- time impact of tax reform that took effect in January.

“Headline inflation rate picked up further to 4.5% in April, but given the smaller increments in inflation rates in the past months, it is likely to hit a peak in Q2. We do expect it to ease back towards the four-percent upper limit of BSP’s target in H2,” market analysts said in a report published yesterday.

The overall increase in prices of widely used goods and services clocked the fastest clip in more than five years last month, which brought the year-to-date pace to

4.1%. The figure is higher than the 2-4% target range set by the Bangko Sentral ng Pilipinas (BSP) even when 2012 prices are used.

The BSP has conceded that inflation will likely miss the official 2-4% target range for 2018, with latest estimates showing the full-year pace could average 4.6%.

“We maintain our view that inflation will continue to breach the BSP’s upper target but will start to head back closer to four percent in Q3,” according to the latest issue of The Market Call.

The latest assessment shows inflation picking up to 4.6% for both May and June before receding to the 4.5% level in July as world crude prices “decline steadily” following a surge expected in May and June.

Noting that “BSP has raised policy rates by 25 basis points ( bps) to 3.25% and with the continued breach of the four-percent target limit and strengthening US dollar and bond yields,” the report said “we think that the BSP will raise policy rates again towards the end of 2018 by another 25 bps.”

BSP Deputy Governor Diwa C. Guinigundo has said that inflation will likely keep rising and peak “towards the end of 2018,” but noted that the tightening move announced on May 10 appears to be enough to bring inflation back to target by next year.

At the same time, FMIC and UA&P analysts see stronger economic growth this quarter compared to January-March’s 6.8%, supported by “robust gains” in infrastructure spending, manufacturing output and private investments. The analysts see full-year growth clocking 7-7.5% at the lower half of the government’s 7-8% target. —