The Bangko Sentral will likely keep key policy rates steady in the last quarter of the year, after raising them by a total of 150 basis points this year, as inflation pressures relax, an economist of IHS Markit has forecast.
In a reply to an e-mail from the Philippine News Agency (PNA), IHS Market Asia Pacific Chief Economist Rajiv Biswas said the impact of the first tax reform package on the rate of price increases will likely moderate in the remaining months of the year, thus, inflation pressures will also decrease.
“This will help to dampen inflation expectations. Therefore, the BSP may need to remain on hold during Q4 to assess whether inflation pressures are moderating towards the end of 2018 before pursuing further monetary policy tightening,” he said.
Earlier, finance officials said the Tax Reform for Acceleration and Inclusion (TRAIN) law has contributed to the spike in inflation but stressed that the bulk of the increase is due to the impact of higher prices of oil in the international market.
The TRAIN law, which took effect last Jan. 1 this year, cut workers’ income tax rates. It gave each worker’s first PHP250,000 annual income a tax-free rate.
To counter the drop in government revenues resulting from lower income tax rates, the excise tax on fuel products was raised. Sugar-sweetened beverages and motor vehicles were also slapped with higher excise taxes.
Monetary officials are optimistic that inflation would peak in the third quarter of this year, normalizing in 2019.
While inflation remains elevated, monetary officials said they remain on the lookout for threats that could exacerbate price pressures so they could implement necessary policy actions.
The BSP, in a statement, also raised the need for “timely and appropriate non-monetary measures that will further mitigate the impact of supply-side factors on inflation, including rice tariffication.”
“The BSP reassures the public of its strong commitment to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability,” it added.