MANILA – The Philippine central bank poured cold water on the prospect of an interest rate hike, maintaining on Tuesday that annual inflation would ease to its target next year, despite the faster rate in February.
Bangko Sentral ng Pilipinas Governor Nestor Espenilla said the central bank won’t necessarily have to make a move based on the February data, which showed that inflation quickened to 3.9 percent, the fastest pace in more than three years under a revised price index.
However, some economists stuck with their view that a tighter monetary policy is warranted because underlying demand-side pressures were strong and there was a need to anchor inflation expectations.
“While it is true that this is likely to be transitory in nature, and that the high base effects will likely mean lower inflation prints next year, we think that the BSP needs to maintain its credibility by raising rates,” said Gundy Cahyadi, economist at DBS in Singapore.
Nomura analysts reiterated their forecast of a total of 100-basis-point policy rate hikes this year, starting at the central bank’s meeting on March 22.
The Philippine peso firmed to 51.81/51.98 per dollar from Monday’s close of 52.00 after the data was released. Philippine shares were down 0.5 percent as of 0502 GMT.
The central bank has kept policy settings steady since it raised its overnight borrowing rate by 25 basis points in September 2014.
“Our forecast remains that inflation will decelerate back to well within target in 2019 whether based on 2006 or 2012 index,” Espenilla said in a text message after the data release.
Espenilla said monetary policy operates with a long lag so any policy action now would be felt in 2019 and beyond rather than 2018.
“That’s why we don’t necessarily react to Feb 2018 but must look much further ahead and rely on forecasts,” he added.
The Philippine statistics agency rebased the CPI calculation to 2012 from the current 2006 base-year and adjusted the weighting of some price groups in the consumer basket to track the changing path of consumption.
Last month’s inflation reading was faster than the 3.4 percent print in January based on the new series, but much slower than the 4.5 percent under the old series, which was above the median forecast of 4.2 percent in a Reuters poll.
The central bank had forecast inflation to fall between 4.0-4.8 percent in February due to the impact of higher taxes and an increase in electricity and food prices.
The central bank expects inflation to average 4.34 percent this year and 3.49 percent next year under the non-rebased index.
“Since inflation in the next 12-18 months would return to the inflation target…, there is no reason for BSP to tighten,” said Joey Cuyegkeng, economist at ING bank in Manila.
Core inflation under the non-rebased index was 4.4 percent, faster than the previous month’s 3.9 percent. On a month-on-month basis, inflation eased to 0.8 percent.
