Bank economists flag upside inflation risks

By Melissa Luz T. Lopez, Senior Reporter
BANK ECONOMISTS expect inflation to remain elevated during the last three months of 2018, with some noting that prices may surge faster by yearend.
The latest survey conducted by the Bangko Sentral ng Pilipinas (BSP) showed a median inflation forecast of 6% from October-December, which if realized will compare to the 6.2% average in the third quarter.
Two out of 26 banks who gave their fourth-quarter estimates even said that prices of basic goods will rise by an average of 7.3% and 7.5%, which is well above the current peak.
Inflation hit a fresh nine-year high at 6.7% in September, which brought the nine-month tally to five percent. The central bank said inflation may have already peaked last month.
For the full year, the median forecast stood at 5.2%, matching the BSP’s estimate to settle well above the 2-4% target band. This estimate is also higher than the 4.5% forecast during the second quarter report released in July.
“Analysts noted that risks to inflation in 2018 remain tilted to the upside,” the central bank said. In particular, the bank economists noted that volatile global oil prices, the impact of the Tax Reform for Acceleration and Inclusion (TRAIN) law, a weakening peso, and rising prices of food due to bad weather and supply issues are driving costs up.
Other factors adding to price pressures include higher utility rates, rising wages and transport fares, strong domestic demand in time for the upcoming Christmas season and upcoming elections, delayed implementation of the state’s mitigating measures to combat inflation, higher infrastructure spending, as well as a global trade war.
Higher inflation expectations are also contributing to overall price movements, the survey bared.
Some relief is expected from the expected approval of the rice tariffication bill, the government’s subsidies for higher fuel costs for jeepney drivers, unconditional cash transfers to 10 million poor Filipinos, and slower global growth.
The series of rate hikes from the BSP — worth a total of 150 basis points since May — should also temper inflation expectations in the long run.
SLOWER NEXT YEAR
The bank analysts grew more sanguine for the next two years as they gave lower median forecasts of 4.2% for 2019 and 3.8% in 2020.
“Meanwhile, inflation is anticipated to moderate in 2019 and 2020 as the impact of TRAIN tapers off, global oil prices stabilize, and the government implements mitigating measures to temper inflation,” the BSP said. “However, analysts are also watchful of potential inflationary pressures from a possible RR (reserve requirement) reduction and the implementation of Package 2 of the TRAIN law.”
Monetary Board Member Felipe M. Medalla said last week that the central bank “may take a pause” from further rate hikes should inflation momentum show signs of easing. He added that the passage of the rice tariffication law — which would remove import quotas and allow private firms to import the crop as needed — would ensure that inflation will return to target by 2019.
Relaxing import rules would also boost supply in the market, which economic managers said could bring down rice prices by P4-7 per kilogram next year.
Economic managers have also recommended the suspension of the fresh P2 per liter excise tax on fuel as world crude prices hover at the $80 per barrel level during the past few weeks.
NOT ENOUGH
In a separate report, HSBC noted that the move to suspend fuel excise tax increase next year will not be enough to temper inflation.
“We don’t expect the suspension of excise taxes on oil by itself to have a significant impact on reducing headline inflation. If current oil prices persist until 2019, pump prices domestically should remain elevated even without the additional excise taxes,” HSBC economist Noelan Arbis said in a report published over the weekend.
“The government’s early announcement, however, could help curb inflation expectations and prevent (or at least limit) the broad-based rise in prices that we saw earlier this year, when the first tranche of taxes was introduced.”
Still, Mr. Arbis noted that inflation “has become the Duterte Administration’s top priority” given the host of measures it took to rein in consumer prices. In particular, stabilizing food prices is “the key to reducing inflation in the near term.”
HSBC expects rice tariffication bringing inflation down by 0.4%, versus the central bank’s 0.7% estimate for 2019.
On the flipside, HSBC said this will mean wider budget and current account deficits. Around P40-billion taxes will be foregone given the suspension of the fresh round of fuel excise tax increase, which HSBC said will add 0.2% to the fiscal gap relative to gross domestic product. This, in turn, could push borrowings higher to plug the gap.