Philippines inflation accelerates in December, BSP likely to hike policy rate in Q3 2017

The headline and core inflation rates of Philippines both were up in December and were consistent with market expectations. The consumer prices rose 2.6 percent year-on-year in December. This brings the 2016 average inflation to 1.8 percent, below the central bank’s target range of 2 percent to 4 percent. The Philippines inflation accelerated mainly because of more rapid annual gains in the good sub-index.

As anticipated, transport prices continued to be on an uptrend, which added 0.14 percentage points to headline inflation. This was the highest contribution from transport prices in 12 months. Excluding the volatile items of food and fuel, core inflation also accelerated to 2.5 percent year-on-year in December.

Solid domestic demand would possibly help accelerate inflation to 3.1 percent year-on-year in 2017. Increasing incomes are likely to keep consumer spending strong. Fiscal spending on infrastructure outside of the National Capital Region would possibly drive growth in investment. In the national budget approved recently, the planned deficit was risen to 3 percent of GDP as compared to the three-year average of below 1 percent in realised deficits.

The Philippine government’s economic team expects an investment-led growth in the medium term. This might result in solid growth in capital imports, further broadening the goods trade deficit, noted ANZ in a research report. The central bank is expected to be one of the first Asian central banks to tighten policy.

“In light of the strong domestic demand, rising inflation outlook and the central bank’s 15-24 months of monetary policy transmission lag, we expect BSP to resume tightening its policy stance by Q3”, added ANZ.

In the meantime, the migration of excess liquidity to the BSP’s term deposit facilities would be closely observed. The excess liquidity kept in overnight reverse repos, overnight deposits and term deposits is around PHP 1.1 trillion.