Philippine vows to tame inflation as it hits a 5-year high

The Philippine central bank said on Thursday (31/05) the annual inflation rate in May would likely remain outside its 2-4% comfort range due to higher fuel and rice prices. (Reuters pic)

MANILA:  The Philippines’ annual inflation rate shot up to its highest in more than five years in June, opening the door for a third rate hike this year as the central bank vowed to get the pace of price increases back inside its target as soon as it can.

Inflation quickened to 5.2% in June from May’s 4.6%, exceeding the central bank’s 4.3-5.1% estimate amid costlier food, alcoholic beverages and tobacco as higher taxes took effect this year.

“The higher-than-expected June inflation outcome is a setback,” Bangko Sentral ng Pilipinas Governor Nestor Espenilla told reporters in a text message.

The central bank “reaffirms its strong commitment to ensure that inflation returns to within the 2-4% target range as soon as possible,” he said. “We will review and update our situational assessment and forecast inflation path.”

The BSP raised interest rates last month for the second time in six weeks mainly to tame inflation, becoming the region’s second central bank to deliver two hikes in a short time, along with Indonesia.

The central bank next meets to review policy on Aug. 9. Asked if policymakers would wait for that meeting to take action or act immediately, Espenilla declined to respond, saying “enough said for now”.”

A hike in August?

Economists at Nomura expect a third 25 basis point hike on Aug. 9 and did not rule out further increases later this year.

“We believe inflation expectations are also likely to rise further, as evident in rising demand for wage increases,” they said in a note.

The June inflation reading also surpassed the 4.8% forecast in a Reuters poll of economist and brought the average inflation rate to 4.3%  in the first half of 2018.

It also marked the fourth straight month that the pace of price increase was faster than the central bank’s 2-4% goal for this year and next.

“Honestly even if BSP hiked (by) 100 bps two years ago, inflation would still have exceeded the unrealistically low and narrow 2.0% to 4.0% target,” Bank of the Philippine Islands economist Jun Neri tweeted.

While the rise in consumer prices is largely supply-driven, the central bank has said a tighter monetary policy is needed to keep inflation expectations from spiking.

Higher interest rates should also provide support for the peso, which has lost 6.5% against the dollar this year, making it one of Asia’sworst-performingg currencies.

Following the inflation data, the peso dropped to as low as 53.44 versus the dollar, near a 12-year trough. Manila’s key stock index fell 1.4%.