The falling export sales of the Philippine manufacturing sector is putting additional pressure on the Bangko Sentral ng Pilipinas (BSP) to raise its rates soon to curb inflationary pressures as an upward inflationary trend is seen hurting the profit margins of the country’s producers.
In its monthly assessment of the region’s manufacturing sector, global research firm IHS Markit announced the overall Nikkei Purchasing Managers Index (PMI) of the Philippines slipped anew to 50.8 in February.
The latest reading is lower than the already low 51.7 index in January and is the second lowest reading in the survey’s history.
The PMI is a composite index to gauge the health of the country’s manufacturing sector. It is calculated as a weighted average of five individual subcomponents.
Readings above the 50 threshold signal a growth in the manufacturing sector, while readings below 50 show deterioration in the industry.
“February data showed tentative signs of recovery in demand after new excise taxes reportedly restricted order book growth at the start of the year,” the report said, adding foreign demand remains soft as indicated by the fall of export sales for the second straight month.
IHS Markit Principal Economist Bernard Aw said the further loss of momentum of the Philippine manufacturing sector in February is likely a predicate of the entire quarter’s weak performance.
Among the indicators of a weak performance across the board in the manufacturing sector include the tax reform’s “adverse impact” on demand, as well as the steep fall of job gains during the month.
“However, what’s particularly of big concern was the tighter squeeze on profit margins as inflationary pressures built rapidly to survey-record rates. There were reports of layoffs as part of efforts to reduce costs,” Aw said.
“Firms continue to blame higher excise tax rates and increased commodity prices, especially oil, plastics and paper for the sharp cost increase. A weaker peso also worsened the impact of higher import costs,” the economist added.
Inflation in January hit 4 percent, touching the ceiling of the government’s 2-percent to 4-percent target range. It also marked the sharpest spike in local commodity prices since 2014.
The BSP said inflation further accelerated in February, projecting the month’s inflation rate to have hit anywhere between 4 percent and 4.8 percent.
Aw said this adds pressure to the BSP to tighten its monetary policy stance to curb inflationary pressures.
“While the influence of tax reforms is expected to fade in the coming months, price pressures could still become more entrenched on rising cost of imported materials, which will add to calls for the BSP to raise interest rates,” the economist said.
“At the recent BSP policy meeting, Governor Nestor A. Espenilla Jr. said that headline inflation is likely to break above the 2-percent to 4-percent target range in 2018, but more evidence of rising price trends is necessary before the BSP decides to tighten policy,”
he added.
In February—the Monetary Board’s first meeting for 2018—the BSP decided to keep its monetary-policy rates unchanged despite their projection of 4.3-percent inflation for 2018.
The current inflation level at the 4-percent territory was last seen in 2014—when inflation averaged 4.1 percent during the year. Inflation then peaked at 4.9 percent between July and August before consequently coming down in the last months of the year.
It was also in 2014 when the BSP last changed its monetary policy stance to tighten rates—a move that was then made on the basis of curbing excessive inflationary growth in the country.
The BSP will be having its next monetary-policy meeting on March 22.