HSBC sees inflation peaking near 4% by midyear before receding

Inflation will likely peak in June at close to 4%, a level that could prod the Bangko Sentral ng Pilipinas (BSP) to raise rates sometime during the second quarter to keep prices at bay, analysts at a global bank said.

The Hong Kong and Shanghai Banking Corp. (HSBC) said the full impact of the tax reform package implemented on Jan. 1 will be felt during the first half, which will drive inflation upward in the coming months. “Headline inflation will also come close to the 4% upper bound of [the target band] in June, before descending below 3% by end-2018.

This is partly driven by second round impacts of tax reform – which will add a total of 0.4-0.7 ppt (percentage points) to headline inflation as per BSP forecasts,” bank economists said in a Jan. 8 report, noting that they are “slightly concerned” about the pace of price increases.

The tax reform law, signed as Republic Act 10963, reduces personal income taxes for those earning below Php2 million, alongside a simpler system for computing donor and estate taxes. Foregone revenue will be offset by the removal of some exemptions to value-added tax as well as higher duties for fuel, cars, tobacco, coal and sugar-sweetened drinks, among others.

The central bank has acknowledged that inflation will rise this year due to tax reform, although BSP Deputy Governor Diwa C. Guinigundo said the higher duties will add less than one ppt to inflation this year.

Higher duties to be imposed under the tax reform package will likewise have a “transitory” impact on consumer prices, BSP Governor Nestor A. Espenilla, Jr. said, as he assured that the central bank is ready to step in “to ward off any threat” to the 2-4% inflation target.