Thailand
Philippines: BSP still expected to hike interest rates
The Bangko Sentral ng Pilipinas (BSP) cannot continue holding off interest rate hikes and will likely announce adjustments beginning May this year.
Japan’s Nomura, Fitch unit BMI Research and banking giant HSBC said they continue to expect rate increases before the end of 2018 given rising inflation,
The central bank’s policymaking Monetary Board last week decided to keep overnight borrowing, lending and deposit rates at 3 percent, 3.5 percent and 2.5 percent, respectively, noting that inflation would remain within target this year and the next.
The result prompted Nomura to trim its rate hike forecast to a total of 75 basis points this year from 100 bps previously.
“[W]e expect these hikes to be delivered in the next three meetings as headline inflation continues to drift higher and BSP addresses investor concerns of it falling behind the curve,” it said.
BMI, meanwhile, believes that policymakers will be increasingly compelled to tighten monetary policy in the coming months.
“Although the central bank argued that its ‘baseline forecast’ is for inflation to remain within its 3.0±1.0 percent target in 2018 and is unwilling to hike interest rates preemptively, we see a high chance of inflation overshooting the band in the coming months if nothing is done,” it said.
The rise will be due to sustained robust credit growth and higher oil prices, BMI explained, with a one-percentage point reduction in the reserve requirement likely adding to inflationary pressures.
“Our forecast is for inflation to average 4 percent in 2018 but we note that risks are increasing skewed to the upside the longer BSP delays hiking interest rates,” it said.
BMI said that with the US Federal Reserve set to continue tightening — further pressuring the peso — the Bangko Sentral would be compelled to hike interest rates by 50 bps to 3.5 percent by end-2018.
Not doing so risks an economic overheating and a continued peso sell-off, it added.
With regional central banks such as those in China, Malaysia, and South Korea all tightening policy, the major risk to financial stability seems likely to come from excessively low interest rates rather than premature tightening.
BMI noted that the Philippine peso was already the worst performing currency in the region — down by close to 4 percent against the dollar since the start of the year — and the five-year credit default swap rate was testing support-turned-resistance.
“We expect the BSP to act sooner rather than later as there was a slight shift in tone in its March statement, where the central bank stated ‘its intent to take immediate and appropriate measures’ should upside risks materialize and inflation become more broad-based,” it said.
HSBC, meanwhile, expects the central bank to hike its policy rate by 25 bps to 3.25 percent in the second quarter as inflation should remain at or above the target range for the majority of the year.
“Our current inflation trajectory shows headline inflation (2012-based) peaking at well above 4 percent in the middle of the year, which poses a risk of inflation expectations de-anchoring from the BSP’s target range,” it said.
Monetary authorities initiated a reserve requirement ratio (RRR) cut in line with expectations and also signaled further reductions to improve liquidity conditions and policy transmission.
“Although it is an important reform, further cuts to the RRR also strengthen our conviction that a policy rate hike is necessary not only to curb inflation expectations but also to prevent sending the wrong signal to the market that the BSP is not serious about meeting its inflation target,” HSBC said.
“We believe one rate hike is enough for the BSP based on our view that its current reaction function relies on inflation and inflation expectations and not on an overheating economy.”
Opposing views were provided by Australia’s ANZ Research and London-based consultancy Capital Economics, which both said that the BSP would hold fire for the rest of the year.
“In our view, price pressures go beyond the impact of tax reforms and tightening is needed. However, as the BSP has not signaled any intention to tighten monetary policy, we will go by it,” ANZ said as it dropped a previous forecast of a total 50-bps adjustment.
Capital Economics, for its part, said rising inflation would not be enough to prod the BSP.
“The main factor behind the recent rise in inflation is an increase in indirect taxes on high-sugar drinks, tobacco and alcohol. Although the year-on-year rate of inflation will remain elevated throughout 2018, it should drop back at the start of next year,” it said.
“What’s more, the statistics authority has started producing a rebased inflation series, which will become the sole measure in July. The new series shows inflation 0.6 percent-points lower than the current measure and within BSP’s target range.”
Source: http://www.manilatimes.net/bsp-still-expected-to-hike-interest-rates/388561/