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ANZ sees inflation hovering above 7% as storm damage stokes price pressures

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INFLATION will likely hover above seven percent in the remaining months of 2018, ANZ Research said, adding to mounting doubts about government expectations that overall price spikes could have peaked last quarter.

The research group said inflation is unlikely to ease anytime soon, with price pressures stoked by typhoon Mangkhut, locally called Ompong, spilling into this quarter.

“We estimate that inflation will remain above 7.0% for all of Q4 2018,” ANZ Research said in its Asia Economic Outlook report released yesterday.

The typhoon ravaged Cagayan Valley, Isabela, Central Luzon, and the Cordillera Administrative Region which are major sources of rice and vegetables.

“It has also been widely reported that production of rice, corn and livestock have been severely affected. All these components account for around 22% of the CPI basket, which is likely to lift inflation in the coming months.”

If realized, this will frustrate Bangko Sentral ng Pilipinas (BSP) expectations that inflation would peak in the third quarter and edge towards its 2-4% target in 2019.

Prices of widely used goods rose by 6.4% in August, marking a nine-year high amid crimped supply of rice, vegetables, meat and fish, as well as rising global oil prices. September inflation is expected to clock in even higher at 6.8%, based on estimates of the BSP and BusinessWorld’s poll last week of private sector economists.

In response, the central bank fired off another a 50 basis point (bp) increase in benchmark rates to demonstrate its commitment to temper price pressures and quell inflation expectations.

Last week, Malacañang issued four administrative orders directing the National Food Authority, the Sugar Regulatory Administration and the Department of Agriculture to lift non-tariff barriers and streamline import procedures for rice, sugar, meat and fish.

“These reforms are positive, in our view,” ANZ Research said. “We believe that a combination of monetary and non-monetary measures is essential to deal with both the demand and supply-side drivers of inflation.”

At the same time, it pointed out that the BSP still needs to hike rates by another 25 bp in its Dec. 13 policy review.

“Whether that will help restore investor confidence hinges on the trajectory of inflation,” bank economists said in the report.

“However, the eight-percent decline in the peso year-to-date, coupled with strong oil prices, will underpin inflation in the near term. Even with a policy rate of 4.75%, real interest rates remain in negative territory.”

ANZ sees full-year inflation at 5.1%, just below the BSP’s full-year estimate of 5.2%. Prices of basic goods went up by 4.8% in the eight months to August.

The International Monetary Fund expects 2018 inflation at 4.9% this year. Other banks and research firms have also given higher estimates such as Capital Economics and Standard Chartered Bank (5.5%) and Fitch Solutions (5.3%).

With unrelenting inflation, ANZ has also scaled down its growth forecast for the Philippines to 6.5% for 2018, coming from 6.6% in August and 6.8% earlier this year.

BSP officer-in-charge Deputy Governor Chuchi G. Fonacier said last week that policy makers are strongly committed to address the threat of high inflation.

BSP Governor Nestor A. Espenilla, Jr., who has been on medical leave since Sept. 19, announced yesterday that it will be extended for another two weeks. “My treatment is progressing very well. But I’ve got to give it the best chance possible,” Mr. Espenilla, who is battling tongue cancer, said in a WhatsApp message sent to reporters yesterday afternoon. — Melissa Luz T. Lopez