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Deutsche Bank AG cuts ’17, ’18 inflation forecast for PHL

MANILA, July 14 — The slowdown in the rate of price increases in the Philippines in June 2017 made Deutsche Bank AG to slash its 2017 and 2018 inflation forecasts for the country to 3.1 percent.

In a research note titled “Asia Economics Monthly: A soft patch” dated July 14, 2017, the German global financial firm said slowdown of inflation rate to 2.8 percent in the sixth month this year from month-ago’s 3.1 percent was 30 basis points lower than its forecast.

“We see inflation inching higher from here, to peak at 3.1 percent, as against our earlier view of 3.3-3.4 percent, within August to October,” it said.

In the first half of the year, domestic inflation averaged at 3.1 percent, slightly higher than the mid-point of the government’s two to four percent target for this year until 2020.

So far this year, inflation hit its highest in March and April at 3.4 percent.

With the slowdown of inflation rate, the German financial firm also revised its adjustment forecast in the Bangko Sentral ng Pilipinas’ (BSP) key rates.

The report said “inflation is likely to settle around the three percent midpoint in the next six to nine months, taking away the need to hike rates.”

“Given these developments, we no longer see the BSP raising rates for the rest of 2017,” it said.

It noted that Philippine monetary officials seem not in a hurry to increase rates given latest inflation developments.

”If anything, we believe the BSP could use this window of benign inflation to cut the reserve requirement ratio (currently at 20 percent), especially in the case wherein domestic liquidity tightens following resident capital outflows and further peso depreciation as may be triggered by continued US Fed policy normalization,” it said.

The last time the BSP adjusted the reserve requirement ratio (RRR) was in May 2014 when it was hiked by a percentage point to 20 percent for universal and commercial banks (U/KBs).

That year, the BSP hiked RRR by a total of 50 basis points, 25 basis points in March and May, as growth of domestic liquidity grew stronger than in the past years at a level of more than 20 percent.

The report said sustained increase in rate of the central bank’s Term Deposit Facility (TDF) “could signal an RRR cut.”

In this week’s TDF auction, weighted average accepted yield of the seven-day TDF improved to 3.2189 percent from 3.1648 percent in last week’s auction.

However, weighted average accepted yield of the 28-day TDF fell to 3.4892 percent from 3.4909 percent last week.

In terms of the impact of the proposed tax reforms, the global financial giant discounts any BSP rate hike because of this.

It explained that the central bank “strongly believes that the excise tax adjustments in fuel and sugar-sweetened beverages, set to be initiated in January 2018, would have only a temporary impact on inflation.”

“The BSP is, thus, unlikely to carry out pre-emptive rate hikes to guard against an impending spike in inflation,” it said.

“Rather, with the initial spike in inflation largely cost-push driven, we believe the BSP will wait for a couple of months to monitor second-round effects of the tax reform,” it said.

“Persistently elevated price pressure, reflecting stronger domestic demand, and the sharp jump in inflation expectations, could prompt the BSP to start hiking rates in May 2018,” it added. (Joann Santiago/PNA)

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