The US Federal Reserve is expected to hike interest rates this week but the inflation-targeting Bangko Sentral ng Pilipinas (BSP) is seen unlikely to follow suit during its monetary setting this Dec. 22.
“Upbeat consumer confidence, and rising inflation expectations support a hawkish BSP stance in this month’s policy rate meeting. However, recent CES (consumer expectations survey) results and/or increased likelihood of a US Fed rate hike [this] week, are unlikely to trigger a BSP rate hike,” Citi Philippines economist Jun Trinidad said in a research note dated Dec. 9.
The economist noted that inflation expectations in the country remained well within the BSP’s inflation target but likely agitated by weak Philippine peso risk that, in turn, stoked fears of currency depreciation putting pressures on inflation.
The country’s inflation rate in November increased to 2.5 percent year-on-year from 2.3 percent in the previous month, overshooting the BSP’s forecast of 1.6-2.4 percent for the month. However, the resulting year-to-date average inflation rate of 1.7 percent was still below the government’s inflation target range of 2-4 percent for 2016.
Meanwhile, the BSP’s latest consumer expectations survey showed that overall confidence index (CI) had risen to an all-time high of 9.2 percent in the fourth quarter of 2016 from 2.5 percent in the third quarter. This was the second consecutive quarter that consumer confidence registered a positive reading, indicating that the number of households with optimistic views increased and outnumbered those with pessimistic views.
The CI is computed as the percentage of households that answered in the affirmative less the percentage of households that answered in the negative with respect to their views on a given indicator.
The CES also showed that most respondents anticipated inflation to increase to 2.7 percent in the fourth quarter from 1.8- percent inflation rate expectation in the third quarter survey.
“Unless first quarter 2017 CES reveals runaway inflation expectations of 4 percent or more, likely influenced by Philippine peso’s lows and firmer oil prices, policymakers would maintain a neutral rate bias, we believe,” Trinidad said.
“Key to the pace and timing of next year’s rate hike would be legislative approval [within first half of 2017] of the excise tax hike on petroleum products (tax reform package), in our view,” he added.
Commenting on the survey, he said spending outlook across commodity groups seemed to favor those whose prices likely be affected by exchange rate and oil price shifts. He said spending on electricity, fuel, medical care, transport and personal care/effects were cited as likely to rise ahead of food, beverage, house rent, furnishings, water, restaurants/ cafes and recreation/culture.”