Inflation seen to end BSP’s rate cut streak
By Doris C. DumlaoPhilippine Daily Inquirer
British banking giant HSBC sees the Bangko Sentral ng Pilipinas keeping its key interest rates on hold at the September monetary policy setting meeting, given the recent increase in food prices and supply disruptions from the floods that swept across the National Capital Region and some parts of Luzon.
In a commentary issued on Aug. 8 after the latest inflation report came out, HSBC economist Trinh Nguyen said while headline inflation still remained at the bottom of the inflation-targetng BSP’s 3-5 percent target, it would likely be on the way up “especially in the next couple of months due to short-term supply shocks and strong domestic demand.”
“Additionally, oil prices have edged up as of late, lessening some of the buffer from high domestic demand that headline inflation has enjoyed. This means that while the BSP would like to reduce the costs of sterilization, it will likely keep rates on hold to monitor price conditions,” the economist said.
It was reported earlier this week that the country’s headline inflation rate had risen to 3.2 percent year-on-year in July. Taking out seasonal volatility, core inflation rose by 4.1 percent year-on-year in July from 3.7 percent in June.
HSBC also took into account the potential impact of the worst floods seen since Tropical Storm Ondoy of 2009. Nguyen said the actual damage was still unknown but “likely to be substantial” as more than 1.2 million people have been affected.
“Pushing crop damage aside, supply disruptions would likely cause an uptick in food prices. This, coupled with rise of crude oil recently, will further fuel inflationary pressures. But even before the tragedy, core inflation has been elevated,” Nguyen said.
Nguyen noted that the country’s growth momentum stayed strong this year, backed by robust fiscal and private spending as well as resilient exports. “Despite this, headline inflation managed to stay at the bottom of, if not below, the BSP’s target thanks to sharp declines of transportation costs and abundant food supply. This means that should food or transportation costs increase, headline inflation would deviate from its current benign rates,” she said.
Both food and transportation costs are, thus, likely to rise in the next couple of months due to both short-term supply shocks as well as the recent rise of oil prices, Nguyen said.
“This means that even if the BSP would like to lower rates further to reduce its sterilization costs, it is unlikely to do so anytime soon. Inflation, both headline and core, is likely to increase in the next couple of months. While the effects of the floods are ephemeral, pent-up demand remains a concern,” she said.
As such, HSBC reiterated its call of a hold at the BSP’s next meeting on Sept. 13. In its last policy rate setting in late July, the BSP slashed its key policy rates by 25 basis points, bringing its overnight borrowing rate to a new record low of 3.75 percent.
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Tags: Business , floods , Inflation , key interest rates
