ING raises inflation forecast for 2018
ING Bank has raised its inflation forecast for next year as lender sees rising price pressures from crude oil and the anticipated tax revision beginning January.
ING Senior Economist Joey Cuyegkeng said that the rate of increase in consumer prices likely at 3.7 percent in 2018, faster than the bank’s previous estimate of 3.5 percent.
“Upward inflation forecast revision implies that inflation in 2018 may test the upper end of the two percent to four percent inflation target range,” Cuyegkeng said.
He added “price pressures on energy due to higher global oil prices together with domino effects of the tax reform package’s excise tax increases for oil products, sweetened beverages and removal of a number of value-added tax exemptions will add supply side pressures.”
Cuyegkeng noted that peso depreciation will also continue in the medium term due to continued deterioration of the country’s trade balance and inadequacy of overseas worker remittances to finance the trade deficit.
“Demand-pull pressures are likely to come from higher take-home pay as a result of the tax reform package’s cut in individual income tax rates and higher threshold income tax levels per tax bracket,” he said.
With an elevated inflation outlook for next year, Cuyegkeng said higher prices will likely contribute to some instability in inflation expectations, prompting the Bangko Sentral ng Pilipinas (BSP) to adjust bechmark rates higher in 2018.
“We are in line with the consensus forecast of two 25 basis points rate hikes in 2018. We believe BSP may hike rates in the second quarter and in the fourth quarter,” he said.
During the November 9 Monetary Board policy meeting, the central bank rates were unchanged but it did lift its 2018 inflation forecast to 3.4 percent from an earlier 3.2 percent projection.
The decision was reached days after the government released a higher October inflation rate of 3.5 percent compared to 3.4 percent in September.
The latest inflation is the highest monthly rate for the year and the highest level since November 2014, about the time the BSP last tweaked its policy settings.
Last week, the BSP did not change its 2017 and 2019 inflation forecasts of 3.2 percent. It continues to expect a manageable inflation environment but decided to adjust next year’s inflation forecast because of the peso depreciation, higher oil prices and what could be an acceleration in liquidity growth.
BSP Governor Nestor A. Espenilla Jr. said after the policy meeting that they are closely monitoring both liquidity and credit growth and their impact on inflation and the financial sector.
“While credit continues to expand in line with output growth, the Monetary Board remains watchful over evolving liquidity and credit conditions and their implications for price and financial stability,” he said.
The BSP's overnight reverse repurchase (RRP) facility is still at three percent, and the rates on the overnight lending and deposit facilities are the same.