Nomura estimates July inflation at 5.6%

INFLATION likely rose to 5.6% in July led by higher electricity rates and rice prices plus higher taxes on cigarettes, Nomura said, noting that the extent of the indicator’s rise would merit a stronger response from the Bangko Sentral ng Pilipinas (BSP).

Nomura economists said prices of widely used goods likely hit another high last month, after a 5.2% reading in June.

“Our forecast is at the high end of BSP’s projected range of 5.1-5.8%, and would be the highest print since 2009,” the bank analysts said in a report.

“The pick-up reflects the combined impact of the next round of increase in excise tax for tobacco as mandated by the TRAIN reforms, higher electricity rates and higher rice prices in July,” Nomura said. “Importantly, beyond these supply-side factors, we believe core inflation likely rose further as the output gap becomes more positive and demand- side pressures remain strong.”

The Philippine Statistics Authority will report official inflation data on Tuesday.

Inflation came in at 2.4% in July 2017. As of end- June, prices have increased by an average of 4.3%, against a 4.5% projection for 2018 and well beyond the 2-4% goal.

Bank economists said this makes the case for aggressive policy tweaks from the Monetary Board at its Aug. 9 meeting. BSP Governor Nestor A. Espenilla, Jr. has promised a possible “strong follow-through” policy action after two rate hikes worth 25 basis points ( bp) each in May and June.

“Rising inflation and inflation expectations, which we have argued are the main policy parameters that will prompt BSP action, are underpinning the signals for a stronger policy adjustment in the near term. The BSP’s latest inflation report showed that inflation expectations have clearly risen,” Nomura said.

“The drivers of inflation have clearly broadened, which would be seen by BSP as a sign of more second- round effects alongside recent demands for wage and transport fare hikes.”

Nomura said there is a 70% chance that the BSP will announce a 50bp hike next week, bolstered by their forecast that economic growth will remain robust during the second quarter.

The government will also announce latest gross domestic product (GDP) data hours ahead of the policy meeting, and the bank expects the economy to have grown by another 6.8% led by manufacturing and construction.

“[ W]e expect BSP to continue to highlight a strong economy that allows it to focus on its inflation-targeting mandate and containing rising risks. We note that BSP has plenty of room to maneuver as the policy stance is not yet tight…,” the economists added.

Strong GDP growth would also build the case for a stronger policy response, as this mean that the economy remains strong enough to “absorb further tightening” in borrowing rates. Still, the growth estimate is below the government’s official 7-8% target for 2018.

The BSP is also expected to remain hawkish and keep the door open for future rate increases. This is to “underscore its readiness to act should it see more evidence of a further buildup of inflation expectations,” Nomura said. —