Fuel, education, electricity costs stoked PHL inflation in June — economists

Consumer prices likely rose at a faster pace last month on higher fuel, electricity and education costs, analysts polled by GMA News Online said.

The median inflation forecast of eight economists was 2.75 percent in June, within the Bangko Sentral ng Pilipinas' (BSP) 2 to 2.9 forecast for the month.

Inflation data is expected to be released Friday, July 5.

“Much of the increase can likely be attributed to annual fare and fee increases in June, particularly for electricity and education,” said

Jeff Ng, economist at Standard Chartered (StanChart) in Singapore.

Emilio Neri Jr., lead economist at Bank of the Philippine Islands (BPI) said, “Fuel price hikes in the previous month on peso weakness and higher world prices also contributed to faster inflation.”

Manila Electric Co. hiked rates by P0.22 per kilowatt-hour (kWh), while over 300 universities and colleges and at least 903 private preschools, elementary and high schools raised their respective tuition fees.

Last month, oil firms raised prices of petroleum products, citing higher prices of world crude. The peso was also trading at the 43 per dollar territory, lower than the 40 to 41

per dollar level earlier this year.

Inflationary pressures, however, were “more than offset by stable food prices,” said Security Bank economist Patrick Ella.

Benign inflation for 2013

Economists also forecast the full-year inflation at a median 3 percent, or at the lower end of Bangko Sentral's 3 to 5 percent target for the year and

lower than its 3.1 percent projection.

“With the global economy not showing any meaningful signs of a pickup, any increases in commodity prices in the coming months are likely to be muted,” said Singapore-based economist for DBS Bank Ltd. Eugene Leow.

The weak peso is prodding import costs higher and weather disturbances that cause food supply bottlenecks are adding upside risks to inflation, according to economists.

“Given that the peso is now trading weaker relative to the dollar, the high exchange rate can help prop up inflation in the coming months,” said Jackson Ubias, Institute for Development and Econometric Analysis executive director.

Ildemarc Bautista, research head at Metropolitan Bank and Trust Co., noted the a weak peso is like a fan that stokes the cost of imported products like fuel.

BPI's Neri said the rainy season may also pose “a potential supply bottleneck which could add inflation pressures.”

Impact on monetary policy

Analysts agreed: benign inflation would keep policy rates untouched at record lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

“The central bank is likely to maintain a neutral stance in July and keep key policy rates on hold,” said StanChart's Ng.

However, their respective opinions are mixed on whether the central bank will slash yields of special deposit accounts (SDA)—a monetary tool to mop up excess liquidity.

“Lowering SDA rates at a time of market turbulence and external slowdown is a logical move for the BSP at this point without compromising the current monetary policy rate settings in the overnight market,” said Security Bank's Ella, forecasting another SDA rate cut as early as this month.

Jun Trinidad, economist at Citi Philippines, said currency weakness in the region “officially marks an end to SDA easing.”

Since January, the yields on SDA placements was already cut thrice to 2 percent.

A higher yield against other investment instruments mops up liquidity in the financial system, while a lower rate flushes money out into the economy. — VS, GMA News

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