August inflation seen at near 3-yr high, rate hike likely

Posted at 09/03/14 12:21 PM

MANILA - Philippine inflation is expected to have quickened for the second straight month in August to reach the upper limit of the central bank's comfort zone, which would make it almost a certainty that monetary policy will be tightened again next week.

Higher electricity and food prices are seen lifting annual inflation in August to 5.0 percent, according to a Reuters poll, up from 4.9 percent in July.

Such a result would mark the first time in almost three years that the annual rate has touched the top end of the central bank's 3-5 percent target band for 2011-2014. The consumer price index has stayed below 5 percent since October 2011 when it reached 5.2 percent.

"With CPI inflation crossing the 5 percent mark, it would justify the policy normalization path currently underway in the economy. As we have discussed previously, another rate hike by BSP (central bank) is likely during the upcoming policy meeting," said Gundy Cahyadi, economist at DBS in Singapore.

In July, the central bank raised the benchmark overnight borrowing rate by 25 basis points to 3.75 percent, the first in three years, to stay on top of inflation pressures as the economy continued to gather speed.

Depending on the inflation result, analysts expect Bangko Sentral ng Pilipinas Governor Amando Tetangco to raise the overnight borrowing rate, or the rate on its short-term special deposit accounts (SDAs), or both, by another 25 basis points at its meeting on Sept. 11. The SDA rate is at 2.25 percent.

In a text message to reporters last week, Tetangco said that the central bank is ready to take further policy steps as needed to prevent consumer prices from getting out of hand.

"The BSP stands ready to implement necessary policy actions to ensure that inflation expectations remain well-anchored and limit any potential build-up of second round effects of current price pressures," he said.

The cost of rice, the national staple, is up 17 percent from a year earlier, due to thin supply and the impact of a devastating typhoon last year.

Transportation of goods which have been slowed down by gridlock at the capital's two major seaports may have also pushed commodity prices higher.

A strong economy is also adding to the pressure on prices. Data last week showed the consumption-driven economy grew at a faster-than-expected 6.4 percent in the June quarter, the quickest pace in over a year.

"Inflation is likely to be near its peak in August, given that supply-side pressure continues to dominate. On the demand-side, resilient consumption also means underlying inflationary pressures remain prevalent," DBS' Cahyadi said.