Phl to lead policy tightening – ANZ

MANILA, Philippines - Asia’s inflation profile is skewed to the upside in 2014, and the Philippines is seen to lead the region in policy tightening.

In a report, the Australia and New Zealand Banking Group Ltd. (ANZ) likewise said that potential growth rates, with the exception of the Philippines, have probably ground lower in the region since 2007-2008 as a lack of corporate visibility and access to long-term finance have constrained the expansion of productive capacity.

It said the Philippines is the only economy in Asia that has experienced a significant upward shift in potential growth in recent years.

“We expect average inflation in 2014 to rise to 4.2 percent, driven by the upward pressure from the expected electricity price adjustments and the questions regarding the government’s subsidy to the Manila Metro Rail Transit System. This is likely to be exacerbated by inflation coming off from a low base comparison in 2013,” ANZ said.

The policy tightening cycles across the Asean is seen to move upwards in the second half of the year.

It further said that recent price developments from regional policy makers suggest there is a small risk of tightening cycle, led by the Philippines in the second or third quarter of the year.

The overnight reverse repo rate of the Bangko Sentral ng Pilipinas (BSP) is presently ranged at 3.5 percent. It is forecast to move to 3.75 percent sometime September and to four percent in the last quarter of the year.

In the monetary policy space across the region, real rates remain extremely low, and on a forward-looking basis, are probably too low.

These will likely come hand-in-hand with much needed fiscal reforms across Asia, leading to the unwinding of food, energy and electricity subsidies, and this is placing upward pressure on both producer and consumer prices.

ANZ said that India and Indonesia may pause on tightening which was largely focused on external stability rather than domestic price fundamentals. Nonetheless, tightening cycles may still be the order of the day in the face of strong regional inflation impulses.

Earlier, the ANZ revised its outlook for the Philippines following the better than expected results of the country’s gross domestic product (GDP) to 7.2 percent.

It has thus bumped up its growth outlook this year to 7.3 percent from the earlier 6.9 percent, and eased somewhat its outlook for 2015 to 6.5 percent. 

Likewise, it revised its 2014 inflation outlook to 4.2 percent.

“We expected sustained resurgence in the manufacturing sector in line with the consistent rise in industrial production growth in the past five months. Sequential growth has been strong indicating the momentum is intact,” the financial giant said in its report.