Inflation to peak at 5.3% in July; peso rate to persist at mid-153

Inflation rate would likely hit 5.3 percent in July – the probable peak this year – while the peso is seen staying at 153-level for awhile and triggering another central bank rates’ increase, economists said.

In its latest “Market Call” report, First Metro Investment Corp. and research partner, the University of Asia & The Pacific (FMIC-UA&P) said July inflation will be slightly higher than June’s 5.2 percent before decelerating for the rest of the third quarter.

It forecasts 5.2 percent August inflation from 5.3 percent in July, and 5.1 percent for September.

As for the exchange rate, FMICUA&P economists are optimistic the peso could close stronger at 152.77 at the end of July, but for the rest of the third quarter, it will stay at 153 level.

The Metrobank-affiliate analysts called the inflation outlook a “disconcerting trend” after climbing to 5.2ercent in June after the previous two months’ “seeming stability.”

“The recent sharp uptick in crude oil prices and in food prices (the latter due to insufficient imports) indicate that rising inflation primarily originates from the supply side, which monetary policy has little effect on,” said FMICUA&P. “We maintain our view that inflation will continue to lodge above the BSP’s (Bangko Sentral ng Pilipinas) target but will start to taper off closer to four percent after the second quarter anchored on the slowdown of crude oil prices and in anticipation of lower cost of rice which will hopefully, be brought about by the proposed rice tariffication and the September harvests,” it added.

Similar to most BSP and inflation watchers, they think that the BSP’s most recent 25 basis points (bps) increase last June 20 is not enough to check inflation expectations from rising. “We think that the BSP will raise policy rates again in the third quarter 2018 by at least another 25 bps in order to douse cold water on expectations of higher inflation.”

The peso, in the meantime, after breaking the P53:$1 resistance will persist on this level for the rest of the third quarter due to a more robust US economy and its higher interest rates.

It said that looking at the peso behavior in June, it will “continue to feel the heat near and long term” because of the large trade deficits and the US dollar strength.

A survey conducted by the BSP of private sector economists indicated a raising of inflation forecast for 2018 to 4.5 percent from 4.1 percent due to higher oil prices, weaker peso, and recent taxes. The mean inflation forecasts for 2019 and 2020 were also adjusted higher to 3.8 percent from 3.7 percent previously (March survey) and 3.6 percent, respectively.