August consumer inflation rise in Philippines, likely to average out by year-end

Consumer price inflation in the Philippines rose during the month of August, despite easing in annual gains of food and non-alcoholic beverages. However, the headline inflation is still expected to average out by end of 2016, before possibly rising next year.

The Philippines’ consumer prices rose 1.8 percent y/y in August. Annual gains in food and non-alcoholic prices slowed down. As expected, the sub-indices for utilities and transport posted monthly contractions. Over the month, the supply of electricity improved as reflected by the decline in the Wholesale Electricity Spot Market (WESM). Core inflation maintained its slow rise to 2.0 percent y/y.

"We still expect headline inflation to average 1.9 percent in 2016 before rising to 3.0 percent in 2017," ANZ said in its research report.

The Bangko Sentral ng Pilipinas (BSP) most recently cut its 2016 and 2017 inflation forecasts to 1.8 percent and 2.9 percent, from 2.0 percent and 3.1 percent respectively). The BSP estimates that the planned increase in excise taxes in oil of PHP6/litre is likely to raise average 12-month inflation by 0.6ppt. Diesel and other types of fuel are currently exempted from excise tax.

However, the weekly auction size of the term deposit facilities (TDFs) will need to be adjusted further before it emerges as the main liquidity management tool of the central bank. Until then, there remains limited room for the BSP to adjust its policy stance and lower its reserve requirement ratio (currently at 20 percent).

Meanwhile, ANZ believes that the BSP is likely to maintain its policy tools through Q2 2017. Less than half of the excess liquidity in the banking system has migrated to the 7-day and 28-day term deposit facilities (TDF) of the central bank.