...but still manageable and with expectations, says Espenilla

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. yesterday said inflation environment will “continue to be manageable over the policy horizon” and levels remain within expectations.

Espenilla said the government’s three-year inflation target of two percent to four percent until 2019 is intact and continue to allow the BSP some leeway in maintaining a stable monetary policy stance.

“Firm domestic economic activity, sufficient liquidity, and well-anchored inflation expectations continue to support current policy settings,” said Espenilla. “However, BSP will continue to closely monitor emerging economic and financial developments to determine scope for further refinement of policy instruments.”

The month of September’s 3.4 percent inflation rate is within the BSP’s 2.8 percent to 3.6 percent forecast, taking into consideration increased prices of rice, fuel and electricity, as well as the peso’s weakness. The five-month high September inflation is higher than August’s 3.1 percent.

During the BSP’s September 21 Monetary Board policy meeting, it did not revise its previous 2017, 2018 and 2019 inflation forecasts of 3.2 percent.

ING Bank Manila senior economist Joey Cuyegkeng in the meantime said the 3.4 percent September inflation is “an upside surprise.”

Cuyegkeng said the market had expected a lower number of 3.1 percent for headline rate as well as core inflation. For September, core inflation was at 3.3 percent compared to August’s three percent, and it was its highest rate since September 2014.

“Impact of four weather disturbances was worse than expected and drove higher food prices,” he noted. “Price pressures from non-alcoholic beverages were also a surprise. But higher energy prices were in line with expectation.”

Cuyegkeng said after assessing the September results, they have raised their 2017 average inflation forecast to 3.2 percent, which is in line with BSP’s forecast. “The risk remains on the upside, in our view. We have retained our 3.5 percent inflation forecast for 2018 and 2019.”

He further noted that the upside inflation surprise “may lead to BSP’s need to turn more cautious if inflation reports for October and November remains on an uptrend. We (have) warned of overheating possibilities.”

Cuyegkeng said domestic liquidity growth (M3) of 15.4 percent in August has already breached its non-inflationary M3 growth range of 10 percent to 15 percent. “If M3 growth continues to rise, we may see more significant demand-pull pressures over the policy horizon … the September inflation rate, together with acceleration in monetary indicators add other indicators that may presage overheating.” The other indicators include imbalances in the economy – wider trade deficits, a current account deficit and fiscal deficits, and a positive output gap since 2016, he added.

“We continue to expect that the BSP may need to implement a pre-emptive tightening at the December meeting to head off overheating in the economy. This would also address the need to possibly re-anchor inflation expectations while preserving interest rate differentials (in the wake of a likely US Fed rate hike),” said Cuyegkeng.