Impact of TRAIN on inflation below 1% – Nomura

The impact of the first package of the comprehensive tax reform program, signed by President Duterte last month, on inflation would be below one percent, enough to breach the upper end of the target set by the Bangko Sentral ng Pilipinas (BSP), according to Nomura Securities Co. Ltd.

Euben Paracuelles, economist at Nomura, said the impact of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) on the consumer price index (CPI) would range between 0.7 to 0.9 percent.

“We maintain our CPI inflation forecast which pencils in 0.7-0.9 percentage points from the total impact of the tax reform, taking the 2018 inflation to 4.3 percent from 3.2 percent,” he said.

The BSP has set an inflation target of two to four percent between 2017 and 2020. Inflation last year rose to 3.2 percent from 1.8 percent in 2016 due primarily to the sharp rise in global crude oil prices.

“If anything, we believe the risks around our forecast are to the upside because of the coal tax, which we expect to ultimately be passed on to consumers and raise electricity rates,” he said.

Nomura sees oil prices averaging $65 per barrel this year.

“As such, we believe the BSP will not be able to look through the risk of headline inflation breaching its target of two-four percent, underpinning our forecast for a total 100 basis points of policy rate hikes, at a rate of one 25 basis point hike per quarter, to four percent,” he said.

The robust domestic demand and manageable environment have allowed the BSP to keep an accommodative policy stance over the past three years to support the expanding economy.

The BSP last tweaked interest rates in September 2014 with a 25 basis point rate hike.

BSP Deputy Governor Diwa Guinigundo earlier said the tax reforms would not necessarily warrant an automatic response from monetary authorities.

However, he said monetary policy could be adjusted if BSP sees evidence of second-round effects and a risk of a wageprice spiral.

“In the near term, key to watch will be the drafting of the implementing rules and regulations, which will guide the execution of the new law and provide clarity over some provisions that may still be open to interpretation. There are some concerns of delays in the unveiling of these rules, but this is not unusual for new legislation and more so for major legislation packages such as TRAIN,” Guinigundo said.