INFLATION pressures are expected to increase later this year due to higher oil prices and poor agriculture output as the El Niño dry spell shifts into La Nina or intense rainy season, ING Bank Manila said in a report Tuesday.
“One pressure is oil price. The positive base effects for low year-on-year oil price change fades by the fourth quarter and could bring a 10 percent year-on-year increase in crude oil prices,” ING Bank Manila senior economist Joey Cuyegkeng said.
“The average price of Dubai crude oil in the fourth quarter of 2015 is around $41/bl. A steady crude oil price of $45/bl later this year could exert some upward pressure. Agriculture production may remain poor as El Niño moves into La Nina later this year,” he said.
He said aside from these possible price pressures, base effects could also become negative. He said inflation expectations remained high for 2017. He said the Bloomberg consensus forecast for 2017 inflation was 3 percent and would moderately accelerate to 3.3 percent in 2018, while the Bangko Sentral forecasted prices at a slightly higher 3.1 percent.
“These expectations imply that inflation would be trending higher and closer to the upper end of the 2-4 percent inflation target range in the next two years. This implies that monetary policy leeway could be diminishing,” Cuyegkeng said.
Inflation in the first four months averaged 1.1 percent, significantly lower than the target range of 2 percent to 4 percent this year. The January inflation settled at 1.3 percent, decelerating to 0.9 percent in February, before accelerating to 1.1 percent in March. April inflation remained at 1.1 percent.
The policy-setting Monetary Board of Bangko Sentral kept the benchmark interest rates during its meeting on May 12, due mainly to the robust domestic economy and low inflation environment.
The interest rates of 4 percent for overnight borrowing and 6 percent for overnight lending were maintained for the 13th consecutive time since October 2014. The rates on special deposit accounts as well as the reserve requirement ratios were left unchanged.
On May 16, however, the board re-calibrated the prevailing interest rates in preparation for the implementation of the interest rate corridor on June 3.
The rate on the current overnight lending facility of 6 percent was reduced to 3.5 percent and 3 percent for the overnight borrowing rate from 4 percent, while the special deposit account rate of 2.5 percent was kept steady.
First-quarter data showed that gross domestic product expanded by 6.9 percent, significantly higher than 5 percent a year ago, affirming the continuing high-growth trajectory of the economy.
The National Economic and Development Authority said the robust performance increased the likelihood of achieving the official GDP growth projection of 6.8 percent to 7.8 percent for full-year 2016, despite the weak agriculture and fishery sector.
Bangko Sentral Governor Amando Tetangco Jr. said the first-quarter figure was in line with market expectations. “This also confirms that policy settings are appropriate right now,” he said.