Philippines:Rate hikes,not too soon
Stitching together price developments over the past three months and theBSP's remarks during our meetings in June, we now see the BSP keeping ratessteady for the next nine months. The tax reform—expected to be implementedin January 2018—should not disrupt this call. But we note that demandinducedprice pressures and a sharp jump in inflation expectations, bothstemming from the tax reform, could initiate the rate hike cycle in the secondquarter of 2018.
Consumer price pressures again eased in June. Both headline and core inflationmoderated by 30bps from the previous month to record 2.8% and 2.6%,respectively. Recall that headline inflation also eased by 30bps to 3.1% in May,while the core—a proxy for underlying price pressures—moderated by 10bps to2.9%. Inflation (headline) averaged 3.1% for the first six months of 2017, just alongthe midpoint of the BSP’s 2-4% target range.
June inflation was pulled down by slower increases in food and most non-foodprices. Prices of food and non-alcoholic beverages rose by 3.5%yoy in the monthas against the 3.7%yoy increase in May and 4.2%yoy earlier in April. Meanwhile,the downward adjustment in electricity rates as well as the drop in crude oil pricesin the month caused non-food inflation, such as of utilities and transport, to ease.
Price surveys were not conducted in the province of Lanao del Sur in June amidthe armed conflict in the capital city of Marawi; and so, the province’s exclusionin the CPI data may have also contributed to last month’s lower inflation reading.
With June inflation coming 30bps below our expectation, we are revising our2017 inflation forecast 10bps lower to 3.1%, and now in line with the BSP’s.
We see inflation inching higher from here on to peak at 3.1%, as against ourearlier view of 3.3-3.4%, within August to October. Inflation is then set to easethereafter to reach a trough of 2.7% in February 2018. Given these developments,we no longer see the BSP raising policy rates for the rest of 2017. Following ourmeetings with BSP representatives in June, we were also under the impressionthat the monetary authority is in no rush to lift rates (see One year on, the Dutertefever lives on). If anything, the BSP could use this window of benign inflationto cut the RRR (currently at 20%), especially in the case wherein continued USFed policy normalization would trigger resident capital outflows and further pesodepreciation. This may be what the new BSP Governor had in mind when heremarked today that the deceleration in consumer prices gives the BSP space tofine-tune its monetary instruments.
Will the passage of the tax reform prompt us to revise our rates outlook? Theanswer is no. The BSP strongly believes that the excise tax adjustments in fuel and sugar-sweetened beverages, set to be initiated in January 2018, would onlycause a temporary impact on inflation. From this perspective, the BSP is thusunlikely to carry out pre-emptive rate hikes to guard against this impending spikein inflation. Rather, with the initial spike in inflation largely cost-push driven, webelieve the BSP is going to wait for a couple of months to see whether pricepressures remain elevated. Persistently elevated price pressures and the sharpjump in inflation expectations due to the tax reform, in our view, could promptthe BSP to start hiking rates in May 2018.