ING expects inflation rate at 3.1% in 2017 vs BSP’s 3.2%

Dutch ING Bank is keeping its 3.1 percent average inflation forecast for the year – lower than Bangko Sentral ng Pilipinas’ (BSP) 3.2 percent – and they expect the BSP will continue to have monetary policy space to ensure economic growth is sustained a long time.

“BSP is likely to use its monetary policy leeway to support growth (and) the leeway is primarily to keep policy settings steady,” said its senior economist Joey Cuyegkeng.

He expects steady monetary policy outlook. The bank’s 3.1 percent inflation forecast is lower than BSP’s 3.2 percent, and is keeping this forecast even as September inflation will be in the higher level as August’s 3.1 percent.

“BSP at their last monetary policy meeting raised their 2017 and 2018 inflation forecasts to 3.2 percent from earlier forecasts of 3.1 percent in 2017 and three percent in 2018. A 3.2 percent 2017 average inflation forecast would tolerate a 3.4 percent average inflation turnout for September to December,” said Cuyegkeng.

As for the central bank’s 3.2 percent forecast rate in 2018, this takes into consideration “some months of relatively high inflation” which will likely simmer down to a more moderate inflation in the second half next year

For ING, this seems unlikely and will not be changing its higher 3.5 percent forecast in 2018, versus the BSP’s 3.2 percent. “(We) expect inflation for the remainder of the year to average at 3.2 percent and keep full year inflation at 3.1 percent. The risk to our inflation forecast for the rest of the year seems to be on the upside. We retain our 3.5 percent average 2018 inflation forecast.”

ING said previously that it expects inflation to rise to 3.5 percent next year – much closer to the BSP’s target band of two percent to four percent – but that high rate will depend on the “aggressiveness of the comprehensive tax reform program’s (CTRP’s) Package 1 in generating a net revenue gain for the government.”

“We anticipate… graduated excise taxes for fuel products and sweetened beverages. The senate is deliberating on its versions of Package 1. We expect the package to get legislature’s approval in the fourth quarter for implementation in January 2018,” said Cuyegkeng.

As for the peso, ING forecasts it will stay at R51 by end-year and R51.4 in 2018.

“(The peso) appreciated last week in line with most Asian currencies. Acquisition-related inflows, higher than expected August inflation, higher shortterm peso rates and continued BSP’s anti-speculator rhetoric combined with more favorable external developments for week-on-week peso strengthening,” said Cuyegkeng. “The more favorable external developments – weak US dollar, dovish view of (US Federal Reserve) Fed’s pace of policy tightening, optimism over geopolitical risks in the very short-term were unexpected developments that pushed peso to trade stronger than the stronger side of the R51-R51.60 trading range.”

Cuyegkeng said however that once acquisition-related inflows have been absorbed by the market, seasonally high import demand may again dominate and push the peso weaker as early as late next week or end of this month.