H2 policy rate hikes seen hitting 100 bps
Inflation likely to remain above 4.0% next year – Deutsche Bank
Monetary authorities could order rate hikes totaling an additional 100 basis points (bps) before the year ends, Deutsche Bank said, as inflation will likely stay above target in 2019.
The German lender’s view runs contrary to that of the Bangko Sentral ng Pilipinas, which estimates that consumer price growth — expected to top 4.0 in 2018 — will return to the 2.0-4.0 target band next year.
In a report, Deutsche Bank chief Asia economist Michael Spencer said that “while the base effect on this year’s tax increase should see inflation drop about 60 basis in the first quarter next year and oil prices should be lower, domestic inflationary pressures are unlikely to abate until 2020.”
This means headline inflation will likely remain above the 4 percent upper target through 2019, he added, although core inflation is expected to be below 4 percent in the fourth quarter.
“The government anticipates that the new tariffication scheme it hopes to implement in the second half of the year will bring rice prices down more than 10 percent,” Spencer noted.
However, he said an updated Deutsche Bank rice price model, which took into account the Bangko Sentral’s focus on commodity prices as the main cause of inflation, showed a different path.
“It’s a simple framework in which inventories held by the private sector and NFA (National Food Authority) at the end of the previous year (relative to the following year’s consumption) offer a reasonable view on the direction of rice price inflation in the coming year,” the economist explained.
He said the model suggested that for prices to go down, rice stocks would need to rise to more than 30 percent of consumption, which would be unprecedented and require about an extra $2 billion in imports.
Spencer noted that in June, retail prices for rice were up 4.7 percent year-on-year, having risen at progressively faster rates since October last year.
“More likely, therefore, food price inflation declines only very gradually next year as fuel prices stabilize,” he said.
“If we’re right that rice prices are unlikely to fall later this year as the authorities appear to expect, then inflation will continue to surprise the BSP to the upside,” the analyst continued, noting that the real policy rate in the Philippines was currently at -1.7 percent — the lowest since March 2009.
For an economy growing above potential with inflation above target, he described this as “inappropriately loose monetary policy.”
After the central bank’s “decidedly hawkish tone” in June, Spencer pointed out that monetary authorities appeared to now agree.
He said that Deutsche Bank modeling suggested that policy rates were still 75 basis points (bps) below where these might be expected.
“We now expect policy rates to rise 100 bps in the second half of this year and another 50 bps in the first half of 2019, reaching 5 percent or 0.9 percent in real terms next year,” he said.
Central bank Governor Nestor Espenilla Jr. last Friday indicated that monetary authorities could order another policy rate hike next month given the peso’s weakening and demand-side inflation pressures.
“[L]et me say that the BSP is considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August,” Espenilla said during a press briefing.
The central bank’s policymaking Monetary Board, which will hold its fifth meeting for the year on August 9, raised key interest rates in May and June to address above-target inflation.
The consecutive 25-basis point adjustments brought the Bangko Sentral’s overnight borrowing, lending and deposit rates to 3.5 percent, 4.0 percent and 3.0 percent, respectively.
June’s inflation result of 5.2 percent, a new five-year high that Espenilla has described as a “setback”, has prompted other analysts to forecast a rate hike of as much as 50 bps as early as August.
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