‘Glenda’ stokes inflation concerns

Typhoon “Glenda” likely has driven up near-term inflation in the Philippines which, in turn, may compel the Bangko Sentral ng Pilipinas to raise the special deposit account (SDA) and overnight borrowing rate, both by 25 basis points, when the next monetary setting takes place on July 31, an economist from the Royal Bank of Scotland (RBS) said.

Philippine financial markets have not fully priced in an interest rate hike by the BSP, RBS economist Vanider Singh said in a July 17 research note.

For the remainder of the year, he said, RBS expects an increase of a total of 50 basis points, including the quarter-percentage point hike seen this month, alongside another percentage point rise in the reserve requirement.

According to the economist based in Singapore, only the rate on SDA—a tool the BSP uses to mop up excess liquidity in the economy—may be the important thing to be considered for now in setting monetary policy.

“The net liability of the central bank, due to its reverse repo facility (overnight borrowing), has remained stable since April last year. Therefore, the policy rate has little relevance for now. The reason we expect the policy rate to also be hiked is because of its continuing signaling ability,” Singh said.

The economist said the typhoon that hit the Philippines recently would likely hasten the rate of rise in consumer prices in the short term due to damaged inventory and the disruption of supply chains in the country.

“While we do expect price controls to be implemented for basic goods in the affected provinces, overall inflation is still likely to edge higher. The typhoon directly hit the economically important areas of Luzon … with central Luzon alone responsible for nearly half of all manufacturing and services output and more than a tenth of the country’s agricultural production,” Singh said.

“At the same time, lingering effects from the fuel price increases … due to the Iraq crisis, are still being felt. The Philippines has no energy subsidies in place,” he added.

RBS expects the Philippines’ inflation figure in July to edge close to the upper limit of BSP’s target of 3-5 percent.

Also, because the market has not fully priced in an interest rate, the peso may gain against the US dollar post-monetary tightening, Singh said.

RBS expects the peso-dollar exchange rate to end the year at 42.80:$1.