The Philippines

Inflation pressure remains

Headline inflation accelerated in January to 4.0% y/y to an over three-year high while core inflation, which strips out volatile food and fuel items, quickened to 3.9% y/y in January, a five-year high. On a month-on-month basis, it accelerated to 1.0%. The implementation of the first package of tax reforms pushed up prices in transport, utilities and sweetened beverages, added with a weak peso. We expect inflation in 2018 to reach the high end of the central bank’s target of 2%–4%. Possibilities for inflation to breach the range remains high. If that happens, it will be the first time in eight years to breach the target. We maintain our view on the need to tighten the current monetary policy. We expect the central bank to commence policy tightening, starting with a 25bps hike in March as inflation will come from firm domestic demand.

• Headline inflation accelerated in January to 4.0% y/y to an over three-year high due to increases in food, alcohol and tobacco prices. Core inflation, which strips out volatile food and fuel items, also quickened to 3.9% y/y in January, a fiveyear high. On a month-on-month basis, it accelerated to 1.0%.

• The implementation of the first package of tax reforms pushed up prices in transport, utilities and sweetened beverages, added with a weak peso. If the peso stays weak due to elevated trade deficits, pressure will mount on the prices of tradeables.

• We expect inflation in 2018 to reach the high end of the central bank’s target of 2%–4%. Possibilities for inflation to breach the range remains high. If that happens, it will be the first time in eight years to breach the target.

• We maintain our view on the need to tighten the current monetary policy. We expect the central bank to commence policy tightening, starting with a 25bps hike in March as inflation will come from firm domestic demand.

Australia

RBA keeps policy rate on hold

In line with our expectation, the Reserve Bank Australia (RBA) kept its official cash rate at its historic low of 1.5% for the 17th straight month. The decision to hold rates is driven by the strong dollar which will weigh on the economic growth, inflation and employment. We feel the current low interest rates should continue to support the GDP. The high household debt and low wage growth will act as hurdles to growth despite a pickup in retail sales which could enjoy an upside, albeit limited. Meanwhile, we expect the central bank to maintain the current interest rates in 2018. Any decision to raise rates will depend on how the GDP, inflation and financial stability craft out. Our probability for the RBA to raise rates in 2H2018 by 25 basis points remains low at less than 30% chance for now.

• In line with our expectation, the Reserve Bank Australia (RBA) kept its official cash rate at its historic low of 1.5% for the 17th straight month. The last time the RBA reduced its official cash rate was in August 2016 by 25 basis points.

• The decision for the RBA to hold rates is driven by the strong dollar which will weigh on the economic growth and employment. Also the strong currency is putting a lid on the current low inflation from reaching the 2%–3% target range.

• We feel the current low interest rates should continue to support the GDP. We expect the policy rate to remain at current levels given the high household debt and low wage growth will act as hurdles to growth despite a pickup in retail sales which could enjoy an upside, albeit limited. Basically, the RBA is stuck with the current rates.

• Meanwhile, we expect the central bank to maintain the current interest rates in 2018. Any decision to raise rates will depend on how the GDP, inflation and financial stability craft out. Our probability for the RBA to raise rates in 2H2018 by 25 basis points remains low at less than 30% chance for now.

Source: AmInvest Research - 7 Feb 2018