Inflation Remained Manageable Amid Rising Global Crude Oil Price

Bangko Sentral ng Pilipinas (BSP) left its reserve repurchase rate unchanged at 3%, as widely expected. Likewise, overnight lending facility rate and overnight deposit facility rate were both hold steady at 3.5% and 2.5% respectively. The decision on the policy rate was in view of healthy domestic demand on the back of positive consumer and business sentiment. However, the central bank warned that the geopolitical tensions and uncertain macroeconomic policies in advance economies will likely to post as downside risk to the economy.

On inflation front, the central bank maintained its projection for inflation target, which is in a range of 2-4% for year 2018-2019. Philippines’ inflation improved to 3.3% yoy in November, after rising to 3.5% in October. On average, inflation rose by 3.2% yoy in the first eleven months of 2017, significantly higher as compared to 1.8% yoy in 2016. While remaining at the range of the central bank target, going forward, the risk to inflation stays tilted towards the upside. This may be attributed to the rising global crude oil price, where Brent continued to hold above US$60 per barrel since end-month of October. Another risk was attributed from the proposed tax reform by the Government, which will likely to take place in first half next year as the Philippine Congress has approved this tax reform bill. 70% of the revenue generated by the tax measure will be used to finance President Duterte’s ambitious infrastructure projects. However, as highlighted by BSP, Government also listed various measures to help control inflation from exceeding the central bank’s target, including “the replacement of quantitative restrictions with tariffs and the deregulation of rice imports”.

Meanwhile, in Indonesia, Bank Indonesia (BI) also kept its main policy rate unchanged at 4.25% for the third staright months. Similarly, the deposit facility rate and lending facility rate were both held unchanged at 3.5% and 5.0% respectively. After a surprise cut in August and September this year, BI noted that the possibility for monetary policy easing next year will be limited as US Fed is expected to continue with another series of rate hike in 2018, which will lead to possible capital outflow from Indonesia and thus, weaker Rupiah. We believe the central bank will continue to monitor the impact from US Fed FFR-hike to ensure exchange rate stability.

Previously, in November inflation press release, BI projected that inflation will likely to hover around 3.0-3.5% by end-2017. Despite the concern on rising global crude oil price, BI said inflation will continue to remain under control in 2018, where BI forecasted inflation to be within 2.5-4.5%. This will be supported by effort from the Government to maintain expected inflation.

Source: Affin Hwang Research - 15 Dec 2017