Solid domestic demand to exert upward pressure on Philippine inflation, BSP likely to hike rate in Q3

Philippines core inflation accelerated to the highest in 30 years in April, while the headline rate remained stable. The headline consumer price inflation rate came in at 3.4 percent year-on-year. Despite the steady print, underlying price pressures are solid. Monthly rise in food and transport prices added considerably to the overall annual change. But more important is that core inflation has continued to strengthen, rising 3 percent year-on-year in April.

Risks on headline inflation continued to be skewed to the upside. Inflation has remained in the upper half of the central bank’s 2-4 percent target range for the last three months. Even though the contribution of transport prices to overall inflation begins to wane in months ahead, solid domestic demand would continue to put upward pressure on headline inflation, noted ANZ in a research report.

Progress on the initial package of tax reforms is also expected to hike inflation expectations. Government estimates show that headline inflation might accelerate by additional 1.5 percentage point in the initial 12 months of implementation of reforms, thereby risking the central bank’s inflation target.

“We stand by our view that the BSP will commence its tightening cycle in Q3 and raise its policy rate by a cumulative 50bps in 2017 and 75bps in 2018”, added ANZ.