BSP seen tightening monetary stance by March to contain inflationary pressures

The Bangko Sentral ng Pilipinas’ (BSP) four percent inflation rate forecast for January has intensified speculations that the BSP is preparing the market for a higher policy rate by March.

ING Bank senior economist Joey Cuyegkeng said if the BSP’s projection of 3.5 percent to four percent inflation is spot-on, as the BSP usually is, this “could raise inflation expectations which may spur BSP to tighten as early as the March meeting.” He had earlier predicted that the BSP will raise benchmark rate in May.

The government will release the January inflation rate on February 6. It will conduct its monetary policy meeting two days later on February 8.

ING forecasts only 3.4 percent for the January consumer price index. According to Cuyegkeng, the “BSP surprised markets with its 3.5 percentfour percent January inflation forecast, which is higher than government's 3.3 percent forecast.” This was the BSP’s highest inflation forecast since November, 2014.

“With such a high January inflation forecast, the market may become worried that inflation will accelerate faster than expected in the coming months,” he added. “Second round effects are still to be determined in March-June. Significant second-round effects could cause inflation to breach the target range of two percent to four percent.”

These second-round effects to core inflation are price shocks coming from wage increases and transportation costs. Generally, central banks such as the BSP accommodate “first round” effects such as rising food prices but will respond to second-round effects to manage inflation.

Cuyegkeng reiterated that the tax reform program which was implemented on January 1, will have a “moderate impact”.

The revised excise taxes have prompted the BSP to consider a high inflation estimate for January, along with the volatile global crude oil prices.

According to the BSP, the “increase in the prices of domestic petroleum product on account of higher global crude oil prices along with higher food prices due to weather-related disturbances could contribute to the rise in inflation for January, 2018. In addition, higher excise taxes on fuel, sugar sweetened beverages with the implementation of the TRAIN (Tax Reform for Acceleration and Inclusion) this month, would lead to additional upward price pressures.”

The lower power costs for January, however, could partly offset the increase in prices.

BSP Governor Nestor A. Espenilla Jr. on Thursday said they continue to update data and assessments to have a better hand at reading market conditions for an “overall impact on the inflation outlook.”

Espenilla noted that the impact of the TRAIN on inflation is “evolving more or less as expected.” The first round price effects on domestic oil prices so far are as they anticipated it to be, he said.