MANILA, Philippines — British banking giant HSBC said inflation is seen picking up close to the upper end of the target set by Bangko Sentral ng Pilipinas (BSP) in June due to the impact of the tax reform program.

Joseph Incalcaterra, chief ASEAN economist at HSBC, said the second round impact of the comprehensive tax reform program would add 0.4 to 0.7 percentage point to headline inflation.

“Headline inflation will also come close to the four percent upper bound of target in June, before descending below three percent by end-2018,” he said.

The BSP has set an inflation target of two to four percent between 2018 and 2020. Inflation kicked up to 3.2 percent last year from 1.8 percent in 2016 due to the increase in global crude oil prices.

President Duterte signed Republic Act 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) last Dec. 19, 2017 as part of the first package of the government’s comprehensive tax reform program (CTRP).

Incalcaterra said private consumption in the country may recover this year due to the acceleration in remittances in the fourth quarter of last year in time for the Christmas season.

HSBC now sees the consumer price index (CPI) rising to 3.4 percent this year from 3.2 percent last year.

According to Incalcaterra, the BSP has made clear its preference not to adjust monetary policy in the absence of pressing inflation risks.

However, the economist said the BSP is likely to tweak its policy settings with a rate hike and a reduction in the reserve requirement ratio for banks within the first half.

“We forecast one 25 basis point hike in the second quarter to defend the upper bound of the inflation target. We also think this will come alongside 100 basis points of cuts to the RRR in the first half, a measure to keep liquidity flush, and fulfill policy goals to deepen financial markets,” he said.

Incalcaterra said the central banks in Malaysia and Singapore would likely tighten ahead of the Philippines as 2018 is seen as an exciting year for monetary policy in the ASEAN.

“We expect tightening in Malaysia, Singapore and the Philippines (likely in that order), but expect rate hikes and increases to be gradual. Indonesia, conversely, may rediscover an easing bias after the fourth quarter GDP print in February – with space for one policy rate cut alongside cuts to the required reserve ratio in 2H18 (RRR cuts in the Philippines, too),” he said.

HSBC sees a 6.7 percent growth for the Philippine economy this year, lower than the seven to eight percent target set by economic managers.