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AS a
result of the runaway increase in consumer prices,
monetary authorities are expected to raise Bangko
Sentral ng Pilipinas interest rates by 75 basis points
as early as June, or by the end of the year at most,
according to a research note from Hongkong and Shanghai
Banking Corp.
HSBC’s
Frederic Neumann said, “We expect government bond yields
to reflect this tripled treat of rising inflation,
widening fiscal deficits, and expanded bond supply to
rise to 7.25 percent, 8.75 percent, 9.5 percent for the
12-month, five-year, and 10-year [RP bonds].”
Investment bank Bear Stearns, recently rescued by
Washington from sinking, agreed with HSBC but said its
major concern is on how the government can sustain
privatization measures by selling various assets.
“[Balancing] the Philippine budget might see a lesser
volume of privatization. Privatization revenues have
been the balancing item that has allowed promised
budget-deficit reduction to remain on course, including
a programmed budget [zero deficit] for 2008,” said Bear
Stearns analyst John Stuermer in his own research note.
“Any
significant reduction of privatization revenues from the
programmed levels could result in a significant budget
deficit for the Philippines in 2008,” he added, noting
that improving tax revenues relies heavily on
privatization proceeds.
Neumann
said there is now evidence the price rises in consumer
goods are spreading beyond rice and other food items,
and that central bank officials will have to take a more
proactive stance because these developments already
undermine the BSP’s overall inflation expectations.
“Sure,
raising rates at this stage may risk slowing growth, but
this appears the inevitable price to pay to keep both
inflation and expectations in line,” said Neumann.
Inflation has already breached the target of 3 percent
to 5 percent average for the entire year, and the
central bank has conceded that goal may not be
achieved.
BSP
Governor Amando Tetangco Jr. sees the most significant
risk to the rate—which rose to a sizzling 6.3 percent in
March from last year’s average of 2.8 percent—still
comes from oil and commodity prices.
“Our
monetary policy stance, at this point, is appropriate,
given that the most significant current risks are
elevated oil and nonoil commodity prices, which are
supply side factors. As you know, this phenomenon is not
unique to the Philippines and is shared by others in the
region. As I have said before, monetary policy may not
be the best tool with these factors. We are also seeing
base effects, which we expect to level off by mid 2008,”
said Tetangco on Monday.
“Having
said that, however, we continue to monitor second-round
effects from high commodity prices. At the same time, we
will ensure that we manage liquidity in the system to
meet requirements of the economy,” he added.
HSBC
said, however, that Philippine policymakers should heed
the call of raising key overnight lending and overnight
borrowing rates since there are evidence that “loose
monetary conditions are playing their part, too.”
“We
therefore raise our year-end forecast for the [BSP]
benchmark rates from 5.25 percent to 5.75 percent, with
possibly more to come in 2009. Of course, even if the
data mandates such a move, it is by no means assured
that the authorities would actually deliver,” he said.
Neumann
said the “wildcard” is the vast amount of liquidity
locked up in special deposit accounts, which in
mid-March was at P610 billion. |
