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Another 50-basis point policy rates increase seen on Thursday

Typhoon ‘Ompong’ impact on agriculture adds pressure on inflation
By: - Reporter / @bendeveraINQ
/ 05:22 AM September 24, 2018

Amid persisting inflation pressures, the Bangko Sentral ng Pilipinas is expected to deliver another 50-basis point interest rate hike when its policymaking Monetary Board meets on Thursday to tackle the monetary policy stance.

“With CPI (consumer price index) inflation pressures surprising on the upside, and with the 6.4-percent August CPI inflation print well above the BSP’s expectations, further monetary policy tightening is expected at the Monetary Board meeting. The BSP Governor (Nestor A. Espenilla Jr.) has already signaled a strong monetary policy response, making a 50-bp rate hike likely at the upcoming meeting,” IHS Markit Asia-Pacific chief economist Rajiv Biswas said in an e-mail.

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Last August, the BSP hiked its key policy rate by 50 bps—the most aggressive in a decade—in view of the higher-than-expected headline inflation.

The nine-year high August inflation figure pushed the rate of increase in prices of basic commodities to an average of 4.8 percent at the end of the first eight months, already above the government’s full-year target range of 2 to 4 percent.

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The BSP has so far raised the policy rate this year by a total of 100 bps.

Also, Biswas said food prices were likely to rise following the onslaught of Typhoon “Ompong” (international name: Mangkhut), which battered the northern regions regarded as the country’s vegetable basket.

“‘Ompong’ has also caused tremendous damage to agricultural production, notably of rice and corn, which will also contribute to short-term food inflation pressures. Domestic rice prices were already up 17 percent year-on-year even before the typhoon hit the Philippines in mid-September,” Biswas noted.

“However, inflation pressures are likely to start to moderate by yearend, as the impact of the TRAIN’s indirect tax rises drop out of the CPI calculation,” Biswas added, referring to the Tax Reform for Acceleration and Inclusion Act, which since January jacked up or imposed new excise taxes on cigarettes, sugary drinks, oil products and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax exemption cap.

Biswas said the rate hikes augured well for the weaker peso, although risks remained as the local currency had depreciated against the US dollar to almost 13-year lows.

“The peso is being hit by a number of factors, including rising US interest rates, emerging markets contagion from the Turkish economic crisis, concerns about the impact on East Asia of the US-China trade war as well as domestic factors, notably the widening current account deficit and eroding foreign exchange reserves. While rising BSP policy rates will help to support the peso, global investors remain concerned about the outlook for emerging markets and further portfolio capital outflows from emerging equity markets could continue to put downwards pressure on the peso,” according to Biswas.

London-based Capital Economics shared Biswas’ expectation of another 50-bp rate hike by the BSP on Sept. 27.

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“The main reason is rising inflation, which jumped much more sharply than the BSP had expected last month, to 6.4 percent, from 5.7 percent in July. Following the release of the August figures, the BSP said it will ‘be looking more closely … to reassess the medium-term inflation path,’ while the Governor (Espenilla) confirmed that a ‘strong monetary response’ was needed. Typhoon ‘Mangkhut’ will have worsened the outlook by destroying crops and pushing up food prices,” Capital Economics explained in a Sept. 21 report titled “Rates hikes coming in the Philippines, markets resilient.”

“The weakness of the peso is another concern for the central bank. The peso has hit 54 to the US dollar for the first time since 2005 and is now down over 8 percent since the start of the year,” Capital Economics added.

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TAGS: Bangko Sentral ng Pilipinas, Business, Inflation
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