BSP sees July inflation to peak at 5.8%

The Bangko Sentral ng Pilipinas (BSP) said inflation rate for the month of July could hit a high of 5.8 percent due to persistent price pressures coming from increases in utility and gasoline prices.

The BSP Department of Economic Research (DER) forecasts a July commodity price index range of 5.1 percent to 5.8 percent. The June rate was 5.2 percent, the highest for 2018 so far. The BSP has noted earlier that they expect inflation to peak in the third quarter.

The government will release the July inflation numbers – core and headline – on August 7, two days before the Monetary Board meets on August 9 to decide how much more is needed to hike benchmark overnight rate.

The market is of the consensus that the BSP’s seven-member Monetary Board will only vote two ways: to raise policy rate by 25 basis points or a more aggressive response of 50 basis points.

In a statement, the DER said the “increases in electricity rates

in Meralco-serviced areas, water rate adjustments in Maynilad- and Manila Water-serviced areas, domestic gasoline and LPG prices, jeepney fares, scheduled increase of the tobacco excise tax, and prices of rice and other agricultural commodities could lead to upward price pressures during the month (July).”

However the DER said it could still fall below 5.8 percent because of a “slight downward adjustment in domestic diesel prices.”

BSP Governor Nestor A. Espenilla Jr. has announced that the Monetary Board will consider what he called “strong follow-through monetary adjustment” on August 9 as they assess the weight of supply-side price pressures. The BSP has already hiked key rates twice, in May and in June, for a total of 50 basis points.

Espenilla said he “reaffirm our strong resolve to ensure that inflation returns to target by 2019 (two-four percent). We are certainly taking into account the potential price pressures of excessive exchange rate volatility.”

The BSP currently has a 2018 average inflation forecast of 4.5 percent and 3.3 percent for 2019. This will likely be revised on August 9 depending on the July inflation turnout.

Based on the latest BSP inflation quarterly report, analysts' inflation forecast was raised to 4.5 percent for 2018, up from 4.1 percent earlier estimated 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.

According to the BSP, analysts pointed to “key upside risks to inflation in 2018 (which) include higher and volatile global oil prices, weakening peso, effects of the implementation of the TRAIN (Tax Reform for Acceleration and Inclusion or Republic Act 10963) law on prices of domestic goods (as well as) rising global inflation, among others.”

Analysts noted that risks to inflation in 2018 remain tilted to the upside due to these factors. It added that the higher government spending on infrastructure, potential rise in wages, adverse weather conditions, and higher utility rates are also inflationary pressures.