Nomura hikes 2018 inflation to 5.4%

MANILA, Philippines — Nomura Securities Ltd. has raised its inflation forecasts over the next two years amid the persistence of higher oil prices, weather-related disruptions, and strong demand conditions.

Euben Paracuelles, economist at Nomura, said in a report titled “Philippines: Inflation still soaring in September” inflation may hit 5.4 percent this year and 4.2 percent next year.

“Our forecast is driven by the likely persistence of the impact of supply-side factors, such as weather-related disruptions, higher oil prices and demand conditions remaining strong,” he said.

He added the government’s counter-measures to increase rice supply would likely take some time.

Nomura said inflation would average 6.8 percent in the fourth quarter from 6.2 percent in the third, but would moderate gradually in the first quarter of 2019.

Inflation averaged five percent in the first nine months after hitting 6.7 percent – the highest since 7.2 percent in February 2009 – in September from 6.4 percent in August.

Paracuelles said inflation on utilities would rise next year amid higher energy prices and higher excise tax on coal under Republic Act 10963 or the Tax Reform for Acceleration and Inclusion Law.

The economist said rising headline inflation would likely drive inflation expectations higher, warranting further policy responses.

“This also implies that the real policy rate will remain negative for some time, which, along with BSP increasingly citing peso as posing a risk to inflation expectations, should remain a key consideration for BSP,” he added.

Paracuelles said the central bank would raise interest rates by 50 basis points in the fourth quarter and by another 50 basis points in the first quarter of next year.

“All this supports our forecast that BSP will hike by another 100bp within the next six months, taking its policy rate to 5.50 percent. We do not believe we have seen the peak of headline inflation yet,” he said.

The central bank has lifted rates by 150 basis points so far this year as its main anti-inflation weapon. It raised interest rates by 25 basis points for the first time in more than three years last May 10, followed by 25 basis points last June 20, 50 basis points – the biggest in a decade – last Aug. 9, and another 50 basis points last Sept. 27.