Inflation seen to hit 5% in August

MANILA, Philippines - Inflation likely accelerated to five percent in August on the back of higher food and energy prices, Singapore-based DBS Bank Ltd. said, adding the Bangko Sentral ng Pilipinas may tighten policy settings further.

“Pressures on the supply-side continue to dominate, stemming from food and energy prices. And on the demand-side, resilient consumption growth means underlying inflationary pressures also remain well supported,” DBS said in a research note.

The figure is still within the central bank’s 4.7 to 5.5-percent forecast for August which already took into account recent increases in a number of food products and hikes in power rates amid weather-related supply and distribution constraints.

Inflation jumped to a 33-month high of 4.9 percent in July, bringing the seven-month average to 4.3 percent. The average remains within the central bank’s three- to five-percent target for the year.

August inflation data will be released by the government today.

DBS said the August reading is not expected to prompt the BSP to “panic” as inflation is seen returning toward four percent by next year.

“Still, the August CPI number is likely to justify more policy tightening by the central bank,” DBS said.

“Absorbing excessive liquidity is still warranted, especially noting that loan growth remains strong at 20 percent year-on-year in the second quarter of 2014, despite the marked pullback seen in fiscal spending in the period,” the bank added.

“If anything, the central bank prefers to make these policy adjustments from a position of strength,” it said.

Monetary authorities in July raised key policy rates to safeguard inflation targets for this year and the next. The move also came ahead of expected normalization in monetary policy settings in other advanced economies.

Aside from adjusting key rates, the BSP earlier this year hiked the banks’ reserve requirements and the special deposit account rate to rein in the strong liquidity growth. Domestic liquidity growth already slowed down to 18.3 percent in July following these adjustments.