9 February 2018
Philippines: Central bank stays dovish despite inflation forecast

BSP, the country's central bank, kept monetary policy settings steady even as 2018 inflation forecasts were revised higher to 4.3%. The bank sees no need to tighten now as inflation is seen returning to its target range of 2% to 4% by early 2019

BSP expects inflation to return to target range by March 2019

The BSP's statement that accompanied its rate decision reflects a "dovish" assessment of the inflation path despite an expected spike in 2018. BSP considers price pressures as transitory and does not see the need to tighten, at least for now. We believe that the government would moderate not only rising prices for rice but also increases in public transport fares and minimum wages.

The steady policy rate decision is based on its forecast that inflation will return to its target range by (March) 2019 after averaging 4.3% in 2018. This decision gains credibility when one considers the 12-18 month monetary policy lag on the real economy. We believe the BSP will need to stabilise inflation expectations in the coming months as the market also considers another wave of excise tax increases and second-round effects in 2019. We expect inflation of 4% this year and 3.5% in 2019 with upside risks depending on the extent of second-round price pressures. We retain our view of policy rate hikes as early as the March meeting. In the meantime. the Philippine peso would likely be open to some weakness.

Asia week ahead: Gong Xi Fa Cai

The lack of any significant policy events and the Lunar New Year holiday in most Asian markets make it an easy week

Holiday-shortened week

Market liquidity will become thin next week as China starts the Golden Week-Lunar New Year holiday, while most other Asian markets will be shut in the last two days of the week. There is little in the way of significant policy events. Central bank policy meetings in Indonesia and Thailand will, in all likelihood, be non-events with both central banks expected to keep policies on hold.

China: Blinding import growth

China's imports in January grew 30.2%YoY in dollar terms. That is really fast growth. We find that the combined effect of more raw material and energy imports and higher import prices explains the number

Imports are hot in China, thanks to raw material needs

China's export growth in January was well within expectations, low teens (11.1%YoY) growth. Nothing eye-catching here.

But imports grew at 36.9%YoY. That is amazingly fast. The reason behind this blinding growth is more raw material imports and higher raw material import prices.

China imported 19.6% more crude oil amounting to 406.4 bn tons, and the average price of crude imports also rose 13.8%. Copper import volumes also rose 16.1% to 4.4 billion ton in Jan, and prices of imported copper rose 15.2%. Steel imports rose 8.9%, the prices of which rose 20.5%.

With hindsight, these increases are not too surprising if we realise that over the past years, overcapacity cuts in China have helped support metal prices, in combination with strong global demand for these metals. .

For crude, we believe that China is filling up its strategic inventory again.

It could be a sustainability strategy

The massive imports of raw materials, combined with the overcapacity cuts that pushed polluting factories out of the market, could mean that China is adopting this trade pattern as part of its sustainability strategy.

We will see if this is the case if this import pattern continues in the future.

Reading time around 3 minutes

Good MornING Asia - 9 February 2018

Markets are down again today, maybe unnerved by fears that the US Senate will not pass a budget bill in time to avoid a US government shutdown. 

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