Higher electricity charge expected to stoke inflation

Categories: Business Updates

Date Posted: 11 Aug 2014

THE higher electricity charge announced for this month will stoke inflation, Citi Research said in a research note yesterday, adding it expected further tightening of monetary policy next month as a result.

The note quoted economist Jun Trinidad of the research arm of Citigroup Global Markets, Inc. as saying higher electricity prices in July, which will be reflected in August bills of Manila Electric Co. (Meralco), pose additional upside risk to inflation.

“Due to higher generation charge, universal charge, lifeline subsidy and taxes in July, Meralco… will be charging an average 31 centavos per kilowatt-hour (/kWh) to residential and industrial consumers in August,” Mr. Trinidad said in the note, adding: “[W]e estimate a direct impact of +0.2% year on year on national CPI (consumer price index) in August from the expected… tariff rate hike.”

Citi noted that electricity and cooking fuel have a CPI weight of 1.8% for Metro Manila, with electricity consumption accounting for the bigger share. Outside the National Capital Region (NCR) and Meralco’s franchise area, electricity consumption alone has a heftier 5.26% weight.

Inflation accelerated to 4.9% last month from June’s 4.4% on the continued strong climb of food prices.

It was the fastest pace since October 2011’s 5.2% and landed at the top end of the Bangko Sentral ng Pilipinas’ (BSP) 4.1-4.9% estimate for that month. It was also up from the 2.5% recorded a year earlier.

The July result pushed year-to-date inflation to 4.3%, above the midpoint of the central bank’s 3-5% target for the year.

The BSP has assured that it stood ready to tighten monetary policy settings further to temper inflationary pressures, one of which was rising power cost.

Meralco on Friday last week announced that electricity rates would go up P0.31/kWh this month as supply deficiency in July caused by unscheduled and maintenance shutdown of various power plants and was aggravated by the impact of typhoon Glenda (international name: Rammasun). These forced the utility to get electricity from more expensive sources like the Wholesale Electricity Spot Market.

Meralco distributes electricity in Metro Manila, Bulacan, Cavite, and Rizal, as well as parts of Batangas, Laguna, Quezon, and Pampanga.

Households consuming an average of 200 kWh per month — which comprise about 75% of the utility’s customer base — will have to pay P61.38 more. Those consuming 300 kWh, 400 kWh and 500 kWh, on average will have to pay additional P92.07, P122.76, and P153.45, respectively.

While power has long been restored in Metro Manila and most areas in Luzon affected by the typhoon, “there’s recurring risk of Meralco’s generation charge likely elevated… due to thin power reserves in Luzon while facing surges in demand and weather disturbance,” Mr. Trinided noted.

A check with the National Grid Corporation of the Philippines Web site showed Luzon with relatively thin reserves of 1,289 megawatts (MW) — equivalent to the capacities of just two major plants — with system capacity of 9,140 MW against estimated peak demand of 7,851 MW.

“Moreover, CPI electricity in areas outside NCR may have the potential to surprise on the upside if power shortfalls in these areas persisted,” he said.

“[W]ith upside risks from CPI electricity and elevated food inflation still dominant in the third quarter, we expect the BSP to sustain its hawkish bias and adjust its policy rate and SDA (special deposit account) rate by another 25bps (basis points) to 4% and 2.5%, respectively, in September and pause thereafter to end this year’s policy tightening cycle.”

The Monetary Board on July 31 raised overnight borrowing and lending rates to 3.75% and 5.75%, respectively, from record lows of 3.5% and 5.5% in the face of persistently elevated inflation expectations. The adjustment was the first since October 2012, when they were trimmed by 25bps. Rates on SDA and bank reserve requirement ratios — the focus of policy adjustments earlier this year — were left unchanged. At its June 19 meeting, the Monetary Board hiked SDA rates across all tenors to 2.25% from 2%. Before that, the BSP also raised banks’ reserve requirement ratio — reflecting money set aside against deposit liabilities — by a total of two percentage points in March and May to slow liquidity growth.

Consequently, domestic liquidity or M3 — the broadest measure of money — eased to 23% to P7.1 trillion in June from May’s 28.4%. It was the slowest pace since June 2013’s 20.2%.

Inflation forecasts were also tweaked anew at the last policy meeting, with the 2014 pace now expected to average 4.33%, down from 4.4% previously. The 2015 forecast, on the other hand, was raised to 3.72% from 3.65%, with authorities noting that risks to the outlook remained amid brewing price pressures.

The Monetary Board is scheduled to meet again on Sept. 11.
Written by: Daryll Edisonn D. Saclag

Source: http://www.bworldonline.com/content.php?section=TopStory&title=higher-electricity-charge-expected-to-stoke-inflation&id=92575

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