MANILA — Philippines’ inflation rate is seen to hit the upper end of the government’s two to four percent target this 2018 but officials of the First Metro Investment Corp. (FMIC) do not consider this a bad thing given the expected sustained strengthening of the economy.
In a briefing Thursday, FMIC president Rabboni Francis B. Arjonillo said the economy is seen to post a seven to 7.5 percent output this year, thus, the impact of the first tax reform package on domestic prices is seen to be manageable.
FMIC forecasts inflation to rise ranging between 3.5 percent to four percent this year due to higher oil prices. This is partly because of excise tax hike on fuel, among others.
Arjonillo said that because of the expected uptick of inflation rate, the Bangko Sentral ng Pilipinas (BSP) is also projected to gradually increase its key rates this year to ensure general price and interest rate security.
“So timing will be critical,” he said but declined to specify when FMIC official consider the rate increase would happen.
FMIC Senior Vice President Christopher Ma. Carelo Y. Salazar said the BSP is seen to hike its key rates by once to twice this year to address the impact of at least three rate increases in the Federal Reserve rates this year.
“BSP may finally follow as well, adjusting its own interest rates once or twice reflecting (the) accelerating economy, higher inflation brought about by TRAIN (Tax Reform for Acceleration and Inclusion), and higher infrastructure spending and higher oil price,” he said.
Salazar declined to say when they think inflation rate would peak this year but said the expected direction is an uptrend.
He also said the BSP is not expected to increase policy rates as well as banks’ reserve requirements only because the Fed increased its key rates.
“The BSP is quite independent. They’ll not move just because the Fed moved. I think the primary driver (of a BSP rate hike) would still be local developments,” he said, citing inflation and stronger domestic expansion.
The FMIC official said the BSP has to implement either a rate hike or a macroprudential measure to prevent an overheating of the domestic economy.
He said interest rate differentials between the US and the Philippines would always be at the back of the mind of BSP officials since higher interest rate in the US is a major consideration for investors to pull out their funds from the Philippines.
“If the funds go back to the States your currency becomes uncompetitive here and your assets – bond and equities – will start to track as well. So to remain quite competitive they will look at that. So that’s a factor (for a rate hike), yes,” he added.
The BSP has not adjusted its key rates even as inflation peaked at 3.5 percent in 2017.
To date, the central bank’s reverse repurchase (RRP) rate is at three percent, the repurchase (RP) rate is 3.5 percent and rate of the special deposit account (SDA) facility is 2.5 percent. These three represent the BSP’s interest rate corridor (IRC), implemented since June 2016.
When the BSP implemented the IRC the central bank’s policy-making Monetary Board (MB) adjusted the RRP and RP rates from four percent and six percent, respectively, but pointed out that these adjustments are policy neutral.
Relatively, Dr. Victor Abola, University of Asia and the Pacific (UA&P) economist, during the same briefing, said implementation of TRAIN’s first package starting this year is seen to hike inflation by 0.6 percent.
He, however, stressed that this is not too high to push inflation beyond the government’s target range. (PNA)