Poll bares rate hike expectation

Inflation likely clocked faster in January as impact of the tax reform law kicked in, coupled with rising global oil prices, prompting several analysts to price in an interest rate hike from the central bank in this week’s policy review.

Nearly all of the 14 analysts asked in a BusinessWorld poll late last week were of the view that inflation will definitely pick up from December’s 3.3% reading and the 2.7% rate seen in January 2017, citing the impact of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that took effect last month.

The poll yielded a 3.5% median inflation estimate for January, which is the floor of the 3.5-4% range given by the Bangko Sentral ng Pilipinas ( BSP) last week. It also compares to the 3.3% estimate given by the Department of Finance.

The Philippine Statistics Authority will report official inflation data tomorrow.

“We are looking at the impact of TRAIN for both food and nonfood prices. However, the impact might have been magnified by higher global oil prices, including weather-related price shocks recently,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines.

“Although January electricity rates were said to be lower, this would have not been enough to offset TRAIN and other related price level impacts.”

TRAIN imposed an additional P2.50 excise tax per liter of diesel and P3/ liter for kerosene, which came at a time of three-year highs for world crude prices. The new law also introduced additional taxes on cars, coal, sugar-sweetened drinks and a host of other items that likely drove up prices of other widely used goods and services.

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp., also cited the weaker pesodollar exchange rate as another factor that stoked inflation as it returned to trading above P51.

The central bank expects full-year inflation to average 3.4% this year, faster than the 3.2% recorded in 2017 but still within the 2-4% target range. BSP Governor Nestor A. Espenilla, Jr. said the central bank will announce revised estimates this week as it prices in TRAIN’s impact.

Mr. Espenilla said the upward trend for inflation remains within expectations, but pointed out that monetary authorities are “carefully assessing” second-round effects of the higher taxes and calibrate policy settings as needed.

Three economists polled expect the BSP to adjust monetary policy settings on Thursday, its first review for 2018.

“With headline CPI inflation expected to rise towards the upper end of the BSP target range during 2018, the BSP Monetary Board is expected to tighten monetary policy by 25bps ( basis points) in Q1 2018, most likely at its 8th February meeting, with a second rate hike expected in Q2 2018,” said Rajiv Biswas, chief economist for Asia-Pacific at IHS Markit.

The central bank has kept its monetary policy stance unchanged since September 2014, except for procedural cuts introduced in June 2016 for the shift to an interest rate corridor scheme. Currently, benchmark rates range from 2.5-3.5%.

DBS economist Gundy Cahyadi said a rate hike from the BSP has been long overdue, noting that now is a good time to proceed as the robust domestic economy can withstand higher interest rates.

Others see the central bank setting the stage for a rate hike in its upcoming meetings, either by March or May.

Euben Paracuelles of Nomura Global Research expects the BSP to “set the stage” for a rate hike at its March 22 meeting, but held on to a 20-30% chance for policy adjustments later this week.

ANZ Research economist Eugenia Fabon Victorino said she is waiting to hear a “more hawkish tone” from Mr. Espenilla on Thursday to keep the window open for a rate hike later this year.

“Even with the expected surge in inflation from direct effects of the tax reform, we sense that the central bank remains hesitant to commence tightening its policy. Thus, we still expect the central bank to wait until the inflation numbers in February are locked in before raising its interest rates in March,” Ms. Victorino said.

Analysts also expect a later date for any cuts to bank reserves amid abundant money supply.

“Given the price pressures ahead, the BSP might hold off any immediate reduction in the reserve requirement ratio (RRR) until it gets a better sense of the actual impact of the TRAIN law. Reducing the RRR now is unwise since it could introduce added inflation uncertainty,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines.

Noelan Arbis of HSBC Global Research, however, said the RRR may be trimmed to 19% to manage liquidity levels, ahead of a 25bp cut in borrowing rates some time next quarter.