MB to meet for first 2018 policy setting

The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, will meet on Thursday for its first policy setting discussion for the year where they are expected to take action on the rising inflation rate. Inflation in January rose to 4 percent, the highest in three years.

ING Bank senior economist Joey Cuyegkeng, in the meantime, said the BSP would have to “anchor” inflation expectations and that the probability of an adjustment to BSP overnight rates this week has increased.

“The likelihood of a tightening move at Thursday’s meeting has increased significantly. We are now looking at advancing the timing of our rate hikes and are reviewing our two-rate hike forecast for 2018,” the economist said.

During its last monetary policy meeting, the MB set the 2018 and 2019 inflation forecasts at 3.4 percent and 3.2 percent, respectively.

According to BSP Governor Nestor Espenilla, “the higher January 2018 reading was expected by the BSP although it is at the top end of our forecast for the month. Due mainly to combined first round effects of TRAIN, oil prices, and food to some extent.” The central bank projected a range of 3.5 percent to four percent for the January inflation.

The last time the rate was in the four percent level was October 2014 at 4.3 percent. Inflation numbers have since then come down to an average of 1.4 percent, 1.8 percent and 3.2 percent in 2015, 2016 and 2017.

The BSP noted that the higher global crude oil prices have increased domestic petroleum prices, along with higher food prices due to weatherrelated disturbances. All these factors contributed to the rise in inflation for January.

In addition, it said that the higher excise taxes on fuel and sugar-sweetened beverages further aggravated price pressures.

Cuyegkeng said the market will be reassessing inflation expectations with the looming second round effects from the tax reform program which he thinks will “keep inflation elevated” through 2019.

“The upside inflation surprise would lead to adjustments to inflation expectations,” said Cuyegkeng. “We are reviewing our 2018 average inflation forecast of 3.7 percent for an upward revision likely to be at least at the top end of BSP’s inflation target range of 2-4 percent.”

“Second round effects are still to be determined by regulators,” he added. “Second round effects are likely to push inflation higher within the year which could push inflation to breach the upper end of the forecast range for some months of 2018.”

The BSP has maintained that inflation path is still manageable “given well-contained inflation expectations over the policy horizon”. This is despite that the balance of risks to the inflation outlook continue to be tilted toward the upside.