After years of keeping monetary-policy settings unchanged, the Bangko Sentral ng Pilipinas (BSP) is likely to pull the trigger and start raising interest rates this year to abate rising pressures on the inflation front.
For 19 consecutive times since September 2014—sans the operational adjustment in May last year for the shift to the Interest Rate Corridor (IRC) system—the Monetary Board (MB) has been maintaining rates on its overnight lending and overnight borrowing facilities, along with keeping other monetary-policy levers untouched, saying domestic conditions and inflation expectations remain within control.
At present, the Central Bank’s monetary-policy setting is at 3 percent for the main overnight reverse-repurchase facility—with the ceiling of the corridor still at 3.5 percent and the floor at 2.5 percent. The reserve requirement ratio, meanwhile, is also still at 20 percent.
Rosy outlook
However, in the Standard and Poor’s (S&P) Global Ratings’s latest assessment of Asia-Pacific economic dynamics, the international credit watcher said the Central Bank is likely to start raising its rates this year while the growth outlook for the economy remains rosy.
“GDP growth of 6 percent to 6.5 percent is easily achievable for the Philippines. A growing middle class continues to support domestic demand. The weak peso will also contribute via a boost to remittances. Inflation is likely to rise significantly this year, and we expect the BSP to begin raising interest rates in response,” S&P said in its Apac Economic Snapshots report.
In September 2014—when the BSP last decided to move its monetary policy to hike it by 25 basis points—the MB made the decision on the basis of its assessment that its inflation target is at risk, as baseline forecast shifted closer to the ceiling of its target range indicating elevated inflation pressures.
In particular, inflation then was hitting above 4 percent—peaking at 4.9 percent in July and August 2014. The Central Bank’s target range for inflation then was also at 2 percent to 4 percent.
Policy meeting
At present, inflation is at 2.7 percent for January. This is projected to rise to average at 3.5 percent this year, based on its forecasts announced in this month’s monetary-policy meeting. For 2018, it is seen to hit 3.1 percent.
Thus, the forecasted rate hike from the Central Bank could come as early as next month, according to Singapore-based regional player DBS Bank.
DBS Bank’s research team, in particular, said a rate hike of 25 basis points “looks likely next month” to kick off the BSP’s own policy normalization.
This will put the BSP’s main rate at 3.25 percent, with adjustments likely to be made accordingly in the IRC’s ceiling and floor.
The BSP is set to meet next on March 23. This will be the MB’s second meeting for the year and the third to the last monetary-policy meeting for Central Bank chief Amando M. Tetangco Jr. as BSP governor before he is scheduled to step down in July.
Local research partnership First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P), however, said that, while their outlook aligns with those seeing a rate hike this year, the BSP is likely to postpone this in the second half of the year.
In its most recent issue of the Market Call, its monthly research views on the Philippines, FMIC and UA&P said the BSP is seen to hike rates not earlier than June this year, given that the Federal Reserve rate increase only occurs in the second quarter of the year.
Adding to that, FMIC and UA&P believe inflation—while projected to go up—will still be contained within the Central Bank’s 2-percent to 4-percent target range for the year.
‘Not worrisome’
The threat of rising inflation pressures, economists said, is not at an alarming level for the growing economy.
“We believe that inflation in the next few months will continue to lodge within the BSP’s 2-percent to 4-percent target anchored on stable weather, which should usher in more stable food prices. In addition, we believe there is little further upside to crude-oil prices, as other countries [i.e., Libya, Nigeria, the US] continue to ramp up supply,” FMIC and UA&P said.
“With inflation still well within the 2-percent to 4-percent target, the BSP may postpone rate hikes to the second half of the year, especially if the next Fed policy-rate increase occurs only in the second quarter,” the research group added.
Tax shifts
S&P also said that while pending tax shifts, such as new taxes on petrol and luxury foods, are generating further inflation pressures, this is “not a big concern”, given inflation’s low starting point.
Inflation has been undershooting its target in 2015 and 2016—with last year hitting 1.8 percent and the previous at 1.4 percent—due largely to the global oil-supply glut causing international petroleum prices to drop.
While the BSP also said among the upside pressures to inflation include the weakening of the local currency, the DBS Bank said it does not see this as a reason to worry, as the Central Bank “seems comfortable with the recent currency movements.”
The peso has been hitting above the 50-to-a-dollar territory in the previous week, with the weakness attributed by the Central Bank to “market demand to service legitimate dollar requirements”, along with domestic concerns, including the external payments deficit.
“These are normally part of a healthy vibrant market. But this is not to say that we will stand back when we see that the movements are disruptive or excessive,” Tetangco earlier said of the peso.
Image credits: Bloomberg News
1 comment
I am really impressed along with your writing abilities as neatly as with the format on your blog. Is this a paid subject or did you customize it yourself? Anyway keep up the nice quality writing, it is rare to peer a nice weblog like this one these days.