BSP likely to commence tightening cycle in Q3, raise policy rate by cumulative 50 bps in 2017: ANZ Research

The Philippines central bank is expected to commence its tightening cycle in Q3 and raise its policy rate by a cumulative 50 basis points in 2017 and 75 basis points in 2018. The monthly contraction in utilities and transport costs dampened the overall increase in consumer prices. Inflation expectations are still likely to rise despite the modifications in the proposed tax reform package, ANZ Research reported.

Both headline and core inflation undershot expectations in May. Although some softening in inflation following a reduction in electricity prices was largely anticipated, lower transportation costs were the main reason for the below-expectations overall reading. Inflation has persisted in the upper half of the central bank’s 2-4 percent target range for four months. The economy is still firing on all cylinders, keeping the upward pressure on headline inflation.

The modified version of the tax reform package that was recently approved by the Lower House of the Congress will have a milder effect on inflation. The Lower House has significantly cut excise taxes on automobiles and struck out the proposed indexation of fuel taxes to inflation in the modified tax reform package. The Upper House of the Congress is expected to start debating on the tax reform package when session resumes on July 24.