ING sees PH inflation below 3% this year, rate increase in 2nd half

Inflation rate may keep below the three percent level this year giving the Bangko Sentral ng Pilipinas (BSP) the leeway to maintain monetary policy stance until the second half with an estimated 25 basis points increase.

ING Bank senior economist Joey Cuyegkeng in a commentary said interest rates will “likely remain steady this first half even as inflation rate trends higher toward the lower and of the two to four percent target range.”

Cuyegkeng expects two things: Inflation will remain below three percent by year end and that BSP will increase rates by 25 basis points in the third or fourth quarter to “stabilize market’s inflation expectations as inflation moves above three percent in 2017.”

Cuyegkeng said on the fiscal health side, he thinks this will remain favorable since the government’s last $2-billion bond issuance of which $750 million is fresh funds. But, he added, the Department of Finance and the Bureau of Treasury only carved out $500 million from the total issue size of the new ROP.

“This indicated that government still have adequate cash to finance an accelerated spending performance in the first half,” Cuyegkeng noted. “The accelerated first half spending performance would offset the weakness in agriculture due to the effects of El Niño while election spending would likely bolster first quarter GDP growth to around 6.5 percent from a relatively weak first quarter 2015 growth of 5.2 percent.”

The ING economist expects 2015 fiscal deficit of about 100 billion including a one-time coco levy fund amounting to 60 billion. Without this fund, the budget shortfall could reach as high as 163 billion.

“Government marginally slashed its growth target this year to 6.8 percent to 7.8 percent from the 7- 8 percent target rate. The growth target for now seems to remain a tall order although we expect the first half 2016 growth to average at 6.4 percent,” said Cuyegkeng.

The impact of El Niño has been reported to be more modest than the 1997-1998 El Niño episode. “The more modest impact could lead to some upside surprise to growth in the first half,” he added.

Earlier, Cuyegkeng said inflation is expected to return to within the inflation target range by mid-year this year, and that inflation will trend gradually higher throughout the policy horizon to end 2017 closer to the upper end of the target range.

The BSP has decided to maintain the same key overnight rates for the past 11 policy meetings in a row.