Weak peso won’t stoke inflation StanChart says policy rate hikes expected in third, fourth quarters

MANILA, Philippines - The recent weakness of the peso is not expected to exacerbate the current inflation uptrend, a global research report by Standard Chartered Bank noted.

“The Philippine peso has been the worst-performing Asian currency relative to the US dollar so far in January, falling 1.86 percent year-to-date. However, we do not think this weakness will translate into domestic price pressures,” StanChart said.

With this, StanChart said it would maintain its inflation forecast of 3.9 percent in 2014, higher than the three percent in 2013.

“We expect inflation to rise from 3.5 percent in fourth quarter 2013 to 3.9 percent in Q1 2014, 4.2 percent in Q2, and 4.3 percent in Q3, before falling to 3.3 percent in Q4,” it said.

Inflation, it said, is likely to peak in the third quarter of 2014, but will remain below the five percent upper end of the Bangko Sentral ng Pilipinas inflation target.

With the expected jump in inflation this year, StanChart said it expects policy rate hikes only in the third and fourth quarter this year by a total of 50 basis points to four percent by end-2014.

But the study pointed out that the weakening of the local currency would greatly affect domestic oil prices.

“The greatest impact of a weaker peso is likely to be on energy inflation, as Brent crude becomes more expensive in peso terms. We think that commodity price fluctuations have a greater impact on inflation than the peso alone,” it said.

In terms of components, it noted that peso changes are likely to have a greater impact on clothing and footwear, furnishing and household equipment, and restaurant/miscellaneous goods and services.

“These items likely include a higher percentage of imported products,” it said.

Combined, it said “these components account for 18.2 percent of the consumer price index basket, versus 61.5 percent for the food and housing/energy components; therefore the impact of foreign exchange fluctuations is not that significant.”

“While we expect the peso to have some inflationary impact on the domestic economy, we do not see sufficient upside to cause the BSP any significant concern,” added.