Inflation seen staying above 4%; BSP may raise rates in May

With inflation rate seen at slightly above four percent in the next three months at least, or until May when it may peak at 4.2 percent (2012 base year), the central bank could begin to raise key rates on its next policy meeting, according to market analysts.

In its latest capital market commentary, Metrobank subsidiary First Metro Investments Corp. (FMIC) and its research partner the University of Asia and Pacific expects inflation to increase to 4.1 percent in March, higher than February’s 3.9 percent. This is within the Bangko Sentral ng Pilipinas’s (BSP) own March inflation forecast range of 3.8 percent to 4.6 percent.

FMIC-UA&P said inflation will likely stay in the four-percent level in April and May at 4.1 percent and 4.2 percent. This could prompt the BSP to adjust rates upwards, the first time it will do so since September 2014.

The report said the “main concern has shifted to the acceleration of inflation” to 3.9 percent in February from 3.4 percent in January, and from 2.9 percent in December 2017 (2012 series).

“The effect of TRAIN may have been more fully felt, even though the sharp 21.9 percent Brent crude oil price and peso depreciation would account for much larger part of the uptick,” it added.

They expect the peso-US dollar exchange rate to continue to range in the high R51 this month, and back to the R52 level in May. Its end-2018 forecast is R52.50:$1.

“The actual US dollar/peso rate in February still remained above both the 30-day and the 200-day moving averages, suggesting a further weakening in peso will linger in the near and long term,” said FMIC-UA&P. “The improvement in the US economy and Philippines’ strong imports are expected to largely put pressure on the peso. Our estimate is that peso will slide to R52.50 by year end.”

The additional pressure of a weakened peso has contributed to the inflation risks, along with the higher electricity and fuel prices.

FMIC-UA&P also noted that with the elevated inflation path – due to temporary factors – this will finally convince the BSP to move its steady policy stance.

“While money growth has kept its low double-digit pace, we think that BSP may raise policy rates in May, or after the Fed makes its rate hike move in March,” the report said. The Monetary Board's next policy meeting, its third for the year, is on May 10.

Protecting the inflation path or the target range is a primary objective of the central bank as this will ensure price and financial stability. It is closely monitoring “evolving price conditions against any signs of incipient price pressures” and that it is prepared to protect 2019 inflation outlook. “(BSP) stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support BSP's price stability objectives,” it often reiterates.

During the Monetary Board’s March 22 policy meeting, BSP Governor Nestor A. Espenilla Jr. said that using the 2012-based CPI, inflation is expected to remain within the target band for 2018 and 2019.

The BSP forecasts inflation of 3.9 percent average for this year and three percent for 2019.