Significant TRAIN impact felt by March — ING

Dutch financial giant ING Bank said second round effects from the implementation of the tax reform law on consumer prices may be felt starting as early as next month.

Joey Cuyegkeng, senior economist at ING Bank Manila, said significant second round effects could cause inflation to breach the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

Cuyegkeng said the BSP surprised markets with its 3.5 to four percent inflation forecast for January, which is higher than the 3.3 percent projection of the Department of Finance.

“With such a high January inflation forecast, the market may become worried that inflation will accelerate faster than expected in the coming months,” he said.

Cuyegkeng said ING Bank expects inflation to hit 3.4 percent in January due to the moderate impact of higher excise taxes from Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law signed by President Duterte last Dec. 19.

The government is set to announce the actual inflation for January on Feb. 6.

“An inflation report this coming Tuesday that is in line with BSP’s forecast could raise inflation expectations which may spur BSP to tighten as early as the March meeting. Our base case is for a rate hike at the May meeting,” Cuyegkeng said.

The first package of the Comprehensive Tax Reform Program (CTRP) crafted by the Department of Finance lowered personal income tax rates but raised the excise tax for fuel, automobiles, sweetened beverages, among others last Jan. 1.

BSP Governor Nestor Espenilla Jr. earlier said monetary authorities were carefully assessing the next round effects and how inflation expectations could be affected as first round price effects of TRAIN and other factors such as oil prices would evolve.

Based on its latest assessment, the BSP’s Monetary Board sees inflation picking up to 3.4 percent this year before easing to 3.2 percent in 2019. Inflation kicked up to 3.2 percent last year form 1.8 percent in 2016 primarily due to higher oil prices.

“We have been updating data and evaluating various price surveys to gain insight on the overall impact on the inflation outlook. This is an intensely data-driven exercise,” he said.