Second round effects to inflation seen in Q2

Market analysts see more evidence of second round effects to inflation brought on by persistent oil price hikes and this will manifest and impact on inflation expectations in May and June.

“The second round effects (will) likely emerge starting in Q2 (second quarter or the months of April, May and June),” according to Metrobank unit First Metro Investment Corp. (FMIC) and its research partner, the University of Asia and the Pacific (UA&P).


This is what Aris Dacanay, an economist at British bank HSBC, is also seeing. He noted that headline inflation in April of 4.9 percent was way above what most market observers predicted.

HSBC, for example, forecasted only 4.6 percent. Dacanay said the increase “was sharp and largely caused by global constraints in the supply-side” while “oil prices are still elevated while supply chain disruptions remain pervasive.”

“Second round effects seem to be kicking in as well,” the bank analyst also said. “Prices of commodities that directly use oil, such as electricity, gas, and transport, have increased, but other commodities are following suit,” he added.

The Bangko Sentral ng Pilipinas (BSP) on Thursday which was the day the government released the April inflation of 4.9 percent, said that inflation is still consistent with its assessment of continued above-target levels over the near term because of volatility in global oil and non-oil prices as an impact of the Russia-Ukraine war.

Inflation rates before the geopolitical tensions started on Feb. 24 was three percent for both January and February. By March, inflation rate increased significantly to four percent from three percent in February, and remained elavated to a higher rate by April. The BSP forecasts a 2022 average inflation of 4.3 percent, above the two percent to four percent target.

The BSP said it is supply-side factors that have been driving inflation. Second round effects, meantime, come from transport groups’ petition for increases in minimum fares and other calls for higher minimum wages. So far, petitions to increase transport fares have been denied by the government.

It is the rising inflation expectations and early signs of second round effects that will convince the BSP to increase rates to stabilize inflation expectations. By doing so, the BSP will be able to manage price pressures and protect its inflation outlook from any sharp adjustments in transport fares.

Both FMIC-UA&P and HSBC economists expect the BSP’s Monetary Board to adjust its two-percent policy rate sooner than the third quarter. BSP Governor Benjamin E. Diokno himself said there is a possibility of a rate adjustment in June but it will depend on the economy’s performance. The gross domestic product (GDP) growth numbers will be announced on May 12. The next Monetary Board policy meeting was on May 19.

In its latest “Market Call” report, FMIC-UA&P said the BSP “will likely raise policy rates only after the elections and the PSA (Philippine Statistics Authority) reports robust Q1 (first quarter) economic growth performance.” The national elections will be held on Monday, May 9.

HSBC’s Dacanay in the bank’s Global Research “Economics – Data Reactions” commentary, said that since the policy rate has been frozen at two percent since November 2020, the pressure for monetary tightening is increasing.

“As inflation accelerates further, and as other central banks are starting to follow the Fed, the risk of the BSP normalizing rates earlier than the third quarter has increased. Doing so would help to tamp inflation expectations and manage outflows. At the same time, the economy is still recovering from the pandemic and tightening prematurely carries risks,” said Dacanay.

“Timing will thus be key,” he added. “Officials will likely scrutinize incoming data especially closely” such as the unemployment data which came out on Friday, May 6. The next report, on June 10, will also be crucial, along with the GDP data next week.

“Helpfully, the BSP has some tactical leeway to decide the exact timing for the first hike, even as the Fed just delivered a 50bp (basis point) hike: net international reserves remain high and the gap between the real policy rates of the Philippines and the US is wide,” said Dacanay.