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Steady Philippine inflation of 3.2% in 2017 seen to rise on new tax rates

MANILA, Philippines – The country's consumer and producer prices logged steady growth in 2017, as faster increase in prices of corn, meat, fish, fruits, and cereals in the Philippines were offset by stable costs of transport, housing, water, electricity, and fuels.

Philippine inflation, or the movement of prices of basic goods and services, remained steady at 3.3% in December last year, similar with that of November 2017, data from the National Economic and Development Authority (NEDA) showed.

The steady inflation rate in December, meanwhile, brought full-year 2017 rate to 3.2%, which was within the government’s target of 2% to 4%.

The 3.2% inflation rate in 2017, however, was the highest since 2014, when it averaged at 4.1%.

This was also higher than 1.8% inflation rate recorded in 2016. (READ: ADB retains PH growth outlook, sees no signs of economy overheating)

The Bangko Sentral ng Pilipinas (BSP) said the average inflation rate in 2017 was higher than 2016 mainly because of the "higher international crude oil prices."

BSP Governor Nestor Espenilla Jr. said on Friday, January 5 the central bank would be on the lookout for any risks to the inflation outlook, ensuring the country's monetary policy stance remains consistent with sustaining price stability conducive to economic growth.

The Monetary Board of the BSP expects inflation to pick up to 3.4% this 2018, due to the implementation of the Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law last Monday, January 1.

The inflation rate, however, is seen to ease again to 3.2% in 2019.

"Robust domestic economic activity, ample liquidity, and well-anchored inflation expectations continue to support within target inflation," Espenilla said.

Maintaining target

For Socioeconomic Planning Secretary Ernesto Pernia, the moderate full-year inflation rate of 3.2% in 2017 is a good basis to maintain the government's inflation target at 2% to 4% in 2018.

"We see inflation over the near-term to remain stable despite pressures that may be brought about by the newly enacted TRAIN program, weather patterns, and uncertainties in international oil markets," Pernia said in a statement.

To relieve the inflationary effects of TRAIN, Pernia said the government needs to prioritize amending domestic laws that will end quantitative restrictions on rice and replace them with tariffs.

"This measure will remove the policy uncertainty in rice trade and thus encourage more investments in production and post-production innovation. The revenues from the tariff can be used to fund or subsidize such innovations," Pernia added.

The socioeconomic planning chief said potential increases in prices in the 1st few months of 2018 will be tempered by the expected decline in power rates as capacity fees from power generators fell due to fewer power outages.

"We are happy that we have stayed within the inflation target last year, and that the Development Budget Coordination Committee will likely maintain the 2% to 4% target range for this year until 2020," Pernia said.

Expecting otherwise

But for some analysts, the TRAIN law and higher oil prices could result to breaching the government's inflation target of 2% to 4%.

Euben Paraceulles, economist at Nomura, said inflation in 2018 is seen to average at 4.3%, breaching the government's target.

"We believe demand-side pressures are even stronger today than in 2014, and thus inflation expectations are also likely to accelerate amid supply-side increases from oil prices and tax reforms," the Nomura economist said.

For Victor Abola, economist at University of Asia and the Pacific, inflation is forecasted to be between 3.5% and 4% in 2018, which is the upper bracket of the government's target,

"We taken into account an additional 0.6% inflation because of the TRAIN. That is why our forecast is between 3.5% and 4%," Abola said in a separate briefing in Makati City.

ANZ Group economist Eugenia Fabon Victorino said the new tax rates are seen to push inflation beyond the government's target, prompting the central bank to hike rates by 50 basis points this 2018.

"We flag upside risks to our 2018 inflation forecasts due to the implementation of the first package of tax reforms. We stand by our view that tighter credit conditions are warranted and expect two rate hikes of 25 basis points each in March and May, respectively," Victorino said.

The country's steady inflation environment and strong domestic demand have given the BSP's Monetary Board enough space to maintain an accommodative stance to support the growing economy. It was in September 2014 when BSP last raised benchmark rates. –