Central bank likely to hike key rates

by By Melissa Luz T. Lopez, BusinessWorld, May 7, 2018

THE BANGKO SENTRAL ng Pilipinas (BSP) may raise interest rates this week after nearly four years of staying on hold, with inflation hitting five-year highs and showing slim signs of slowing over the coming months, analysts said in a BusinessWorld poll.

Nine of 11 economists tapped late last week expect the BSP’s Monetary Board to tighten its policy stance on Thursday, marking the first time in several years when bets for a rate hike stood almost certain.

The central bank last raised key policy rates in September 2014, when inflation was trending above the 3-5% target that year. Benchmark rates currently range from 2.5-3.5% following some procedural adjustments introduced in June 2016.

Policy Poll

“It’s quite possible that the BSP may hike rates by 25 basis points this May as a clear signal to the market that it wants second round effects from supply-side inflationary pressures addressed or preempted this early,” said Ildemarc C. Bautista, vice-president and head of research at the Metropolitan Bank & Trust Co.

Analysts said rate tightening is “long overdue” from policy makers, with inflation maintaining its ascent for the fourth straight month.

Prices of widely used goods hit a fresh peak in April at 4.5%, coming from March’s 4.3% and 3.2% a year ago. This pushed the four-month average to 4.1%, already beyond the 2-4% target range of the central bank.

BSP Governor Nestor A. Espenilla, Jr. on Thursday acknowledged that inflation may have “spread somewhat” to cover more goods, against the previous observation that price increases are largely due to higher taxes imposed on oil, alcoholic drinks and cigarettes under the tax reform law.

“Recent statements from the BSP are increasingly pointing to a rate hike in May 2018. The change in the BSP’s tone can be attributed to rising inflation expectations and signs of broadening price pressures,” added Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines (LANDBANK).

Several economists have pointed out that BSP officials have since turned more hawkish compared to their tone during their March 22 review. Monetary Board Member Felipe M. Medalla has said policy makers will have to “rethink” their stance should inflation risks persist longer.

The observers also found comfort in Mr. Espenilla’s previous statement that economic growth is strong enough to absorb higher borrowing rates.

The Philippine Statistics Authority will release first-quarter gross domestic product (GDP) growth data on the same day as the BSP’s rate-setting meeting.

Rajiv Biswas, chief economist for Asia-Pacific at IHS Markit, said a “modest” uptick in rates would not stunt the growth momentum, but flagged that rising world prices could force additional hikes from the BSP: “Higher oil prices would also result in a widening trade deficit, which could increase the drag on GDP growth from net exports and also put downwards pressure on the peso.”

Some, however, said the BSP can still hold off on policy adjustments.

“I see that they recognize the need to move but I still sense the hesitation and eventually defer to see if the inflation pressures will spread further,” said Ruben Carlo O. Asuncion, chief economist at the UnionBank of the Philippines.

He noted that month-on-month inflation eased to 0.3% in April from 0.7% the previous month, and that positive rating actions from Fitch Ratings in December and S&P Global Ratings in late April render current policy settings “appropriate” and supportive of economic growth.

ANZ Research analysts also said current price dynamics warrant a rate hike, but said the BSP has sounded reluctant to adjust rates.

RRR CUT

Meanwhile, there is a toss-up in bets on whether the BSP will adjust the reserve requirement ratio (RRR) imposed on banks this week.

Some are betting that a fresh cut may be introduced alongside a policy hike, while some expect this tool to take the backseat.

Michael L. Ricafort of the Rizal Commercial Banking Corp. said a reserve cut is possible in the context of “manageable” growth in money supply. If realized, this would follow a one percent reduction which took effect in March.

LANDBANK’s Mr. Dumalagan also said an RRR cut could be on the table, with the central bank expected to capture excess liquidity through the term deposit facility and other tools.

ING Bank N.V. Manila’s Jose Mario I. Cuyegkeng, however, said cutting bank reserves alongside a rate hike will simply create “confusion” about the BSP’s policy direction.

A succeeding RRR cut will likely be introduced later this year as inflation starts to decelerate, said Security Bank Corp. economist Angelo B. Taningco.

Traders have said market players are already pricing in a rate hike from the BSP this week, which has exerted upward pressure on yields.