ANZ slashes Philippines inflation forecasts for 2017, 2018

MANILA, Philippines - The Australia and New Zealand Banking Group Ltd. has lowered its inflation forecasts for this year and next as the rise in consumer prices likely peaked in March and April.

ANZ economist for Asean Eugenia Victorino said the bank has lowered its inflation forecast to three percent instead of 3.2 percent for 2017 and to 3.3 percent instead of 3.5 percent for 2018.

“Having topped off in March and April, we have cut our 2017 and 2018 inflation forecasts,” Victorino said.

She explained the revised forecasts did not consider the impact of the proposed tax reforms being pushed by the Duterte administration that is expected to push inflation higher at least in the initial stages of implementation.

“We have not considered the impact of the proposed tax reform package in our revised forecasts,” she added.

According to Victorino, the expected tax reform package would structurally raise private consumption not only with the cut in personal income taxes but also with the payment of other compensatory measures for low-income households.

Victorino pointed out the increase in excise taxes on fuel and automobiles would also raise transportation costs that account for eight percent of the consumer price index (CPI) basket.

The Department of Finance estimates an increase of 0.9 percentage point to headline inflation in the first 12 months of implementation.

“We will revisit our inflation forecasts based on the progress the government makes in passing this tax package,” she said.

Inflation eased to a five-month low of 2.8 percent in June from 3.1 percent, bringing the average inflation to 3.1 percent in the first six months of the year, well within the two to four percent target set by the Bangko Sentral ng Pilipinas.

With the benign inflation environment, ANZ now sees the BSP raising interest rates once equivalent to 25 basis points instead of twice this year and twice or 50 basis points in the first quarter of next year.

“We now expect only one increase of 25 basis point in Q4 2017 and two hikes in Q1 2018. Credit growth is still accelerating despite the easing momentum in economic activity. In the past, the central bank tended to respond by tightening macroeconomic prudential regulations,” she said.

Newly installed BSP Governor Nestor Espenilla Jr. is scheduled to preside over the rate-setting meeting as chairman of the Monetary Board for the first time on Aug. 10.

He pointed out the lower inflation reading in June provides the BSP some space for fine-tuning its monetary policy.

“This validation gives us the space to carefully consider our policy options with respect to fine tuning deployment of our monetary instruments to further the market-based development of the domestic financial market,” he said earlier.

The BSP’s Monetary Board last tweaked its policy stance with a 25 basis point rate hike in September 2014.