Philippine Inflation Spikes, But BSP Likely To Hike Only 25Bp In December

(MENAFN- ING) Fuel prices drove almost the entire the surge in CPI inflation

Philippine inflation surged to 7.8% year-on-year in October from 7.2% in September, in line with our forecast but above the consensus expectation of 7.6%. The acceleration was almost entirely driven by higher fuel and electricity prices. They added around 70bp to headline inflation, while non-rice food inflation fell by 30bp. Core inflation also picked up sharply, rising to 5.4% y/y from 4.8%, largely reflecting higher transport fares and stronger price pressures in restaurant and hotel services. It's above the central bank's target for the sixth month in a row.

Food inflation trends were more mixed. Rice inflation remained elevated at 20.7% y/y but was broadly unchanged from the previous month. More notable, however, was the easing in non-rice food inflation. This is driven largely by softer price increases for vegetables and seafood, providing some offset to higher energy-related inflation pressures.

BSP to remain cautious, though the case for another jumbo hike could fade

Risks to food inflation remain skewed to the upside given the recent increase in rice prices across Asia. Prices of food items that are typically more sensitive to El Niño-related weather disruptions, such as vegetable oils and corn, remain elevated in the Philippines relative to previous severe El Niño episodes. While food inflation risks remain a concern, the sharp decline in global oil prices in recent weeks, amid improving prospects for a de-escalation of US-Iran tensions, should provide some relief to fuel and transport costs going forward. As such, the near-term inflation outlook remains challenging. But softer energy prices could help offset part of the upside pressure from food inflation.

From the Bangko Sentral ng Pilipinas' (BSP) perspective, October inflation came in strong but remained within its forecast range, making the outcome largely unsurprising. Indeed, the earlier 50bp jumbo rate hike was likely delivered largely in anticipation of this inflation surge. Looking ahead, developments around Iran following the US mid-term elections, coupled with a weaker USD and lower oil prices, suggest the BSP may prefer to assess the cumulative impact of past tightening before moving aggressively again. If oil prices continue to ease and 3Q GDP growth next week prints weak, we think the case for another jumbo hike is limited. That said, a 25bp rate hike in December remains our base case, as the BSP is likely to maintain a cautious tightening bias and stay ahead of potential inflation risks and sticky core inflation.

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