A rate hike in May? (4)

PHILIPPINES - In Brief 26 Apr 2018 by Romeo Bernardo

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In its latest meeting this week, the Development Budget Coordination Committee (DBCC) announced a weaker outlook on the exchange rate for its planning horizon (by P1/$ to a range of P50-53/$ from P49-P52/$) that we think will have short term monetary policy implications. The DBCC is an inter-agency body, composed of the budget department, the finance department, the economic planning department, the Office of the President and the BSP that meets regularly to review government’s medium-term macroeconomic targets and fiscal program.Together with the DBCC’s view of more expensive oil (higher by $5/bbl range of $55-70/bbl for Dubai crude oil), the revised numbers will translate into higher future inflation forecasts, lending further support to our view that the Monetary Board will hike policy rates to rein in inflation expectations when it meets two weeks from now (May 10).It is worth noting that in its analysis of 1Q18 inflation, the Department of Finance (DoF) blamed the higher than forecast headline inflation on “a combination of higher global crude price, the peso’s depreciation, and profiteering.” A recognition of its position may this time around sway the finance secretary, a member of the Monetary Board, to be less sensitive to popular sentiments blaming the new tax law, which his team shepherded through congress, for rising prices. Public dissatisfaction with the first tax package (TRAIN) may put at risk the second tax package dealing with corporate income tax and fiscal incentives, that the DoF is currently pushing.The DBCC also increased the share of foreign borrowings for financing the budget. From the original 20% in the 2018 budget documents, foreign financing...