BSP seen to adjust settings to temper inflation

After inflation reached a higher-than-expected rate of 2.7 percent in September, the Bangko Sentral ng Pilipinas is now said to be mulling over options to temper the rise in consumer prices.

According to Citigroup economist Jun Trinidad, the BSP may hike the rate of special deposit accounts (SDA) by 25 basis points sometime in December before it adjusts its overnight policy rate by the end of the first quarter of 2014.

Local inflation, in terms of the consumer price index (CPI), may rise beyond 3 percent in the fourth quarter of this year and likely peak at 4 percent in the third quarter of 2014, Trinidad said in a recent research paper.

In a separate research paper, Bank of the Philippine Islands economist Emilio Neri Jr. said the rapid acceleration of headline rate in September suggested that the BSP could raise the official inflation forecast over the short term.

While inflation is expected to continue to accelerate until the end of the year, Neri does not expect the central bank to alter its key policy stance this year as headline inflation for the full year will likely settle at the low end of the BSP’s target.

Neri said the faster-than-expected inflation print, however, could compel the BSP to raise or widen its relatively low 2015 inflation target of 2 to 4 percent “to demonstrate its ability to adapt to the rapid changes in sentiment in the external environment.”

By raising the inflation target, the BSP may fulfill its dual mandate of maintaining price and financial stability. Such a move, Neri said, would be accepted by the market.

Citi’s Trinidad expects the BSP to adjust its overnight policy rate by the end of the first quarter of 2014 after tweaking the SDA rates by yearend.

But he noted that such adjustments need not be made if the BSP were to undertake more macroprudential measures or allow the Philippine peso to appreciate further.

A stronger peso against the US dollar helps temper inflation by making imports, such as crude oil and other goods, cheaper in local currency terms.

Citi expects the Bangko Sentral to allow the peso to appreciate past 43:$1 in the fourth quarter given the upcoming remittance season.

While the current inflation trajectory remains well within the BSP’s annual inflation target range of 3-5 percent, Trinidad said the central bank would likely tinker with its macroprudential instruments, in particular the SDA rate and reserve requirements, before adjusting its monetary policy rate.

“Other than inflation catching up with strong growth over the past four quarters, double-digit money supply growth due to liquidity exiting the SDA and higher inflation expectations comprise additional arguments why tightening signals and corresponding actions are inevitable,” Trinidad said.

The September inflation of 2.7 percent exceeded the market consensus of 2.4 percent, and even the BSP’s forecast range of 1.9 to 2.8 percent for the month.

BPI’s Neri said that, while the September inflation report came as a surprise to most analysts, this validated his team’s view that inflation had already hit bottom last August and could accelerate closer to the BSP’s inflation target of 3-5 percent for the year.

The central bank may also allow the peso to appreciate more so that price pressures can be tempered. As a result, the local currency may again outperform other currencies in emerging Asia, Neri said.

“Upcoming inflation reports should also validate that there remains a low likelihood that Philippine inflation would exceed the midpoint of the 2014 target (4 percent) in the second half of 2014, and should appease markets of an immediate policy tightening,” Neri added.