Headline inflation rose in September due to higher food, fuel and transport costs by 3.4% y/y, matching the rate of increase in March and April. Despite higher inflation, we found the overall headline inflation to be within the central bank’s range of 2.8% – 3.6% for the month of September and full year of 2% – 4%.

We expect inflationary pressure to remain in the coming months of 2017 driven by higher domestic fuel prices, weaker peso and minimum wage hike, but should be within the government's target of 2% to 4%. Thus, it still allows the central bank to maintain the current monetary policy. However, we foresee the central bank becoming more cautious, especially if the inflation in October and November continues to stay on the uptrend. If that happens, the possibility for a rate hike in December gets higher.

We noticed the peso opened at 51.010 against the USD and traded within a range of 50.954 – 51.065 on 5 October. Post-inflation data, the peso closed at 50.987 against the USD. We expect the peso to trade within a range of 50.69 and 51.29 in the near term. Against the MYR, the PHP is poised to trade around 12.028 and 12.103.

• Headline inflation accelerated in September due to higher food, fuel and transport costs. Inflation rose 3.4% y/y in September matching the rate of increase in March and April. Core inflation, which strips out volatile food and fuel items, stood at 3.3%.

• Despite higher inflation, we found the overall headline inflation to be within the central bank’s range of 2.8% – 3.6% for the month of September. Also, we found the overall average inflation for the first nine months of 2017 averaged at 3.1%, which is well within the central bank's 2% – 4% target for 2017 and makes up for 93% – 96% of our full-year projection which is 3.2% – 3.3%.

• Meanwhile, we expect inflationary pressure to remain in the coming months of 2017. Inflation risk is expected from higher domestic fuel prices, weaker peso and minimum wage hike. Nonetheless, we reiterate our view that the overall inflation for the full year of 2017 will still settle within the government's target of 2% to 4%.

• Underpinned by a manageable inflation, the central bank is able to leave its monetary policy unchanged since it raised interest rates by 25 basis points in September 2014. However, we foresee the central bank becoming more cautious. More so if the inflation in the months of October and November continues to stay on the uptrend. If that happens, the possibility for the central bank to raise rates in December will get higher, a move to ease the economic overheating and address the interest rate differentials against the US Fed fund rate should the Fed raise rate in December.

• On the peso, we noticed it opened at 51.010 against the USD and traded within a range of 50.954 – 51.065 on 5 October. Post-inflation data, the peso closed at 50.987 against the USD. We expect the peso to trade within a range of 50.69 and 51.29 in the near term. Against the MYR, the PHP is poised to trade around 12.028 and 12.103.

Source: AmInvest Research - 6 Oct 2017