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Hikes in BSP rates in Q4 seen

Rate of price increases in the Philippines posted a five-month high of 3.4 percent last September, firming up analysts’ projections for a central bank rate hike starting in the last quarter of 2017.

In a research note, ING Bank Manila senior economist Joey Cuyegkeng said the uptick of inflation from last August’s 3.1 percent was an “upside surprise” since market expectations were for a flat inflation rate.

“Impact of four weather disturbances was worse than expected and drove higher food prices,’ he said.

These weather disturbances include typhoons “Kiko”, “Maring”, “Nando” and “Odette”.

Core inflation, which excludes volatile items food and oil, also rose to 3.3 percent from three percent due to across-the-board increases in sub-indices, with alcoholic beverages and tobacco rising by 6.4 percent.

With the unexpected rise of inflation last September, Cuyegkeng adjusted upwards his inflation forecast for 2017 from 3.1 percent to 3.2 percent, which is similar to the latest Bangko Sentral ng Pilipinas’ (BSP) forecast for this year until 2019.
    
“The risk remains on the upside, in our view. We have retained our 3.5 percent inflation forecast for 2018 and 2019,” Cuyegkeng said.
    
With the upside adjustment in ING’s inflation forecast, Cuyegkeng believes that a “pre-emptive tightening” of rate is possible during the December meeting of the central bank’s policy-making Monetary Board.
    
“This would also address the need to possibly re-anchor inflation expectations while preserving interest rate differentials (in the wake of a likely Fed rate hike),” he added.
    
To date, the central bank’s reverse repurchase rate is three percent;  repurchase rate at 3.5 percent;  and 2.5 percent for special deposit account .
    
ANZ Research, in a study issued Thursday, said the higher-than-expected inflation rate last September gives the central bank reason to implement rate hikes, which it forecasts to be a total of 50 basis points in the first quarter of 2018.
    
It said uptick, particularly in core inflation, shows that “demand pull pressures are intensifying.”
    
“On top of the rise in fuel costs and the expected knock on effect of the tax reform, the government recently approved taxi fare hikes which will take effect as soon as all taxi meters have transitioned to the new fare formula,” it said.
    
ANZ Research also cited the “combined imbalances of elevated credit growth, excessive activity in real estate, and deterioration in the current account are deepening.”
    
“Overall, this strengthens the case for a tighter monetary policy and our conviction around policy rate hikes of 50bps (cumulative) in Q1 2018,” it added.