PHL inflation ‘to top out’ at 5-6% in May-June —DBS

Inflation is expected move at a faster rate of 6 percent starting next month as a result of the tax reform program, according to DBS Group Research.

“Having risen above the official 2-4 percent target to 4.3 percent year-on-year in March, CPI (consumer price index) inflation is only expected to top out around 5-6 percent in May-June from the tax reforms, not helped by a weaker exchange rate,” DBS said in a market commentary.

Inflation accelerated to 4.3 percent in March, the quickest pace in at least four years, compared with the government’s target of 2 to 4 percent.

Inflation is a key consideration of the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) in deciding whether or not to adjust policy rates.

DBS analysts said market participants are now pricing in a rate hike during the next monetary policy meeting in May. “The Philippine markets are positioning for a rate hike at the next monetary policy meeting on 10 May,” the commentary read.

“As for the next central bank meeting on 10 May, we see the overnight borrowing rate higher by 25 bps (basis points) to 3.25 percent,” it added.

During its policy meeting on March 22, the BSP decided to keep policy rates unchanged even if inflation was expected to take an “elevated” path the rest of the year.

Should an accelerated inflation warrant higher policy rates, Bank of the Philippine Islands (BPI) said this would benefit local lenders.

“Interest rates are trending up and that always tends to help banks as long as they don’t trend up too high,” BPI president and CEO Cezar Consing told reporters in Makati City on Thursday.

“The ability of banks to reprise their assets certainly helps their bottom lines. If they trend up too high, then you’re going to see loan losses,” he said.

Consing noted banks will also benefit from economic growth and lower reserve requirement ratio against the cash holdings of lenders.

“The potential for higher interest rates, the potential for even maybe lower reserve requirements, and the potential for continued growth are all good things for banks,” he said.

The Monetary Board has reduced the reserve requirement ratio by 1 percentage point to 19 percent. —VDS, GMA News