Philippines headline inflation stable in December, BSP likely to hike rates in March and May

Philippines’ consumer price inflation remained stable in the month of December, coming in line with market projections. The headline inflation stayed elevated at 3.3 percent year-on-year, taking the whole of 2017 average to 3.2 percent from 2016’s 1.8 percent.

On a sequential basis, consumer price inflation slowed from November’s 0.5 percent to 0.3 percent in December. In spite of this moderation, the headline prices have now risen for 22 consecutive months. All items, with the exception of utilities, recorded monthly gains.

Core inflation continued to be strong at 3 percent year-on-year in December, in line with the strength of domestic demand. According to an ANZ research report, inflation is likely to come in at 3.5 percent in 2018, but there appear to be upside risks to the forecast. Even before the alterations in tax rates, upward adjustments to public transport fares have been imminent. The implementation of the first package of tax reforms would possibly contribute to the upward prices pressures, especially in utilities, transport, sweetened beverages and tobacco.

“We expect these adjustments to push 2018 inflation to above the upper limit of the central bank’s 2-4 percent target range. Average inflation has not breached the upper bound of the target range in eight years”, stated ANZ.

Meanwhile, the Finance department has estimated that the tax reform package will contribute 0.4 to 0.7 percent to headline inflation this year. But these estimates include the direct and not secondary impact of the tax reforms.

It is uncertain whether the central bank would react to the rise in inflation that emanates from the tax reforms. Even so, the underlying imbalances including rapid credit growth and elevated trade deficits warrant a policy response.

“Accordingly, we expect two rate hikes of 25bps each in March and May respectively”, added ANZ.

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