Philippine inflation accelerates sharply in August, BSP likely to hike policy rate by 50 bps in September

Philippine headline and core inflation accelerated sharply in the month of August. The consumer price inflation rose to 6.4 percent year-on-year in the month, accelerating from July’s 5.7 percent, coming in well above expectations. This is the highest rate since March 2009 and further away from the top of BSP’s 2 to 4 percent inflation target range. Meanwhile, core inflation rose more modestly in the month, accelerating to 4.8 percent year-on-year from 4.5 percent year-on-year prior, but is still the highest since April 2009.

Sequentially, the headline inflation accelerated to 0.9 percent in August from July’s 0.5 percent. The rise in prices was tilted towards a few categories. Food prices rose strongly by 1.6 percent sequentially in August because of higher prices for rice and key food items due to weather and supply disruptions. Recreational services also affirmed to 1.5 percent sequentially from 0.3 percent in July. Moreover, transport costs continued to be elevated at 0.8 percent. The rate of rise in all other components was either slower or remained stable in August.

The headline inflation has now stayed above the upper bound of the central bank’s inflation target range for six straight months. The evolution of inflation continues to be challenging. The combination of strong domestic demand, lingering impact of tax reforms, subdued peso and increased global crude oil prices implies that cost-push pressures might stay strong, noted ANZ in a research report.

To bring back inflation below target might need additional policy response. BSP has already increased the policy rate by 100 basis points since May; however, real interest rates are still negative.

“We now expect the BSP to hike the policy rate by another 50bps to 4.50 percent at the upcoming 27 September meeting. Further moves beyond that cannot be ruled out”, added ANZ.