MB may spring...
Strength and timing
of policy response The BSP is pressed for time to come up with a quicker end to a rising inflation. The data-driven BSP will focus more on the month-on-month numbers, both with and without seasonal factors.
Consumer price index (CPI) with seasonal factors, the rate has increased month-on-month by 0.9 percent in January, 0.7 percent in February, 0.5 percent for March and April, zero in May and 0.6 percent in June. Without seasonal factors, the January to June month-on-month increases were 0.7 percent, 0.6 percent, 0.7 percent, 0.3 percent (April and May) and 0.6 percent in June.
There was a slowing momentum in March to May. The drivers for the CPI increase have been housing, water, electricity, gas and other fuels – due to high oil prices, peso depreciation – and education services as a result of upward adjustment in tuition in private schools.
The market is likewise looking for a clearer signal from the BSP particularly on the policy of reducing the reserve requirement ratio (RRR) and the tightening of monetary policy.
“We have seen in the past six months that a liquidity infusion with an RRR cut stokes peso weakness and encourages demand pull pressures on inflation and also encourages imports which would further widen an already widening trade and current account deficit,” noted Cuyegkeng, adding that a RRR cut now “would sow further confusion and would be ill-advised since market always looks at an RRR cut now when inflation is soaring to be a liquidity infusion.”
It’s a different take for HSBC economists but they too were surprised with June’s price increases which “suggest that inflationary pressures are alive and kicking.” They also noted that core inflation – which excludes certain volatile items – showed sharp increases as well to 4.3 percent year-on-year in June from 3.6 percent in May.
HSBC is holding off any prediction of a third, even a fourth rate hike for this year, that any further tightening will probably happen in 2019, especially if the rice tariffication bill is passed at the end of 2018. “Government officials are hoping to pass a rice tariffication bill that would eliminate quantitative restrictions on rice imports, possibly shaving 0.2 percentage-points off of headline CPI this year (the magnitude depends on when the bill is ultimately passed) and 0.6 percent next year, according to BSP calculations,” it said.
But it may not be enough, the British bank added, with electricity prices increasing this month on the back of continued oil price increases.
“HSBC expects further tightening by the BSP only in 2019, due to our expectation for rice tariffication to put downward pressure on prices into year-end 2018,” it said. However, delayed passage “risks stunting any disinflationary impact the measure may impart on inflation this year.”