Inflation likely peaked in August 2018, says Deutsche Bank

MANILA, Philippines — Deutsche Bank said inflation likely peaked in August, but the Bangko Sentral ng Pilipinas (BSP) is still expected to deliver more rate hikes until next year.

In its latest Asia Macro Insight titled “Rough road ahead,” Deutsche Bank said the central bank may turn more hawkish to rein in rising inflationary expectations.

“Although we think headline inflation has peaked in the Philippines, it is at a rate well above BSP’s target, requiring further aggressive rate hikes,” the investment bank said.

Inflation leapt to a fresh nine-year high of 6.4 percent in August from 5.7 percent in July, bringing the average to 4.8 percent in the first eight months and exceeding the BSP’s two to four percent target due to higher oil and food prices, weak peso, and the impact of the new tax reform law.

Deutsche Bank sees inflation averaging 4.8 percent this year before easing to 4.4 percent next year, both above the central bank’s two to four percent target.

The BSP’s Monetary Board has so far jacked up 100 basis points this year to curb rising inflationary pressures. It lifted rates by 25 basis points for the first time in more than three years last May 10 followed by another 25 basis points in June 20, and 50 basis points – the biggest in 10 years – last Aug. 9.

Deutsche Bank said it expects the BSP’s Monetary Board to raise interest rates by another 100 basis points this year, including a 50 basis point hike this month and another 25 basis points in the fourth quarter.

For 2019, the investment bank sees another 25 basis point rate hike in the first quarter.

Deutsche Bank added external deficit economies like the Philippines, India and Indonesia are likely to continue with relatively aggressive rate hikes due to their weaker currencies.

“The external deficit economies like India, Indonesia and the Philippines are likely to continue with relatively aggressive rate hikes, given the sharper depreciation of their currencies and – in the Philippines – much higher inflation,” it said.

The Indian rupee is the worst performing currency with a depreciation of 11.7 percent since the start of the year, followed by the Indonesian rupiah with a decline of 9.04 percent.