Has inflation peaked yet? No consensus forecast this time

With the September inflation rate not turning out to be as high as expected by the market, analysts ponder whether the Bangko Sentral ng Pilipinas (BSP) would continue to hike interest rates aggressively in the coming months.

Average prices based on a basket of goods consumed by a typical household rose by 6.7 percent year-on-year in September, the fastest pace in almost a decade. This was slightly lower than the 6.8-percent market forecast in the aftermath of Typhoon “Ompong.”

For Dutch financial giant ING, the latest inflation data backed its assessment that inflation was close to or had peaked for the year and would taper off going into the yearend.

“This diminishes to some extent the likelihood of a 25-basis-point rate hike in November, as BSP keeps the powder dry for further action, if warranted, should the peso continue to slide,” ING economist Nicholas Mapa said in a research note on Friday.

ING believed the Philippines would benefit from favorable base effects going into December, noting that rice imports have arrived in ports and were now being distributed. Up to 750,000 metric tons were seen to arrive in the coming weeks to help alleviate pressures further.

“We hope further nonmonetary policy measures begin to take root ahead of the Christmas season. On risks to the upside, oil prices remain elevated, which has been reflected in the recent prices increases at the pump,” Mapa said.

“That being said, the BSP remains vigilant against any signs of second round effects and will look to anchor inflation expectations going forward,” he added.

For Euben Paracuelles, economist at Japanese investment house Nomura, the Philippines has not seen inflation peak yet.

Nomura expects the BSP,  which had so far raised interest rates by a total of 150 basis points this year, to hike by another 100 basis points within the next six months. Such move would take the overnight borrowing rate to 5.5 percent.

“In terms of the timing of these hikes, we pencil in 50 basis points in fourth quarter 2018 and 50 basis points in first quarter next year, taking into account the trajectory of our inflation forecasts. We expect headline inflation to remain elevated for the rest of 2018, averaging 6.8 percent in fourth quarter versus 6.2 percent in third quarter, before moderating gradually by first quarter 2019,” Paracuelles said.

Nomura believes the BSP would remain firmly focused on taming inflation expectations given the risk that headline inflation may persist above the 2-4 percent target next year, rather than pinning down the exact timing of the inflation peak to determine the course of its policy action.