DBS hikes inflation forecast to 4.2%

MANILA, Philippines — DBS Bank Ltd. raised its inflation forecast for this year and now expects the consumer price index to breach the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

Using the 2012 base year, DBS economist Gundy Cahyadi expects inflation to hit 4.2 percent, instead of 3.6 percent, this year before easing to 3.5 instead of 3.8 percent next year.

Data released by the Philippine Statistics Authority (PSA) showed inflation kicked up to its highest level in more than three years at 4.5 percent in February from four percent in January under the old series using the 2006 prices.

Using the new series with the 2012 prices, the consumer price index also leapt to 3.9 percent in February from 3.4 percent in January.

“Notwithstanding the change in the CPI series, the higher inflation trajectory this year is clearly putting more pressure on real interest rates,” Cahyadi said.

Authorities have attributed the continued rise in inflation to the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law last Jan. 1.

“While the inflationary pressures from the revised taxes are indeed transitory in nature, and the high base effects will likely mean lower inflation prints next year, CPI inflation is set to remain at or above four percent for the rest of the year,” he said.

The BSP has set a medium term inflation target of two to four percent between 2018 and 2020.

Based on the latest assessment of the central bank’s Monetary Board last Feb. 8, inflation would average 4.3 instead of 3.4 percent this year before easing to 3.5 instead of 3.2 percent for 2019.

The robust domestic demand and benign inflation environment have allowed the BSP to keep an accommodative policy stance to support the growing economy over the past three years.

It last raised interest rates by 25 basis points in September 2014.

However, Cahyadi said there is pressure on the BSP as real interest rates are set to fall further.

DBS has penned a 100 basis point increase in benchmark rates with a 25 basis point rate hike for every quarter.

The last rate-setting meeting of the BSP for the first quarter is scheduled on March 22.

“Even if we factor in a 25 basis points rate hike every quarter this year, real interest rates may fall to -1 percent by June 2018, the lowest since end-2014,” he said.

Cahyadi said resisting pressure to raise rates indicates the BSP’s sustained tolerance for a weak peso that could be a drag on the overall gross domestic product (GDP) growth given the large need for capital goods imports for investment growth.

“For now, we are maintaining our GDP growth forecast of 6.7 percent for 2018 and 2019, buy may revise this on further depreciation of the peso,” he said.