Philippines: Banks cite reduced rate hike pressures
By Melissa Luz T. Lopez
THERE IS LESS PRESSURE for the Bangko Sentral ng Pilipinas (BSP) to raise rates further this year as inflation has somewhat eased and the trade gap can be expected to narrow, two global banks said.
Deutsche Bank has scaled down its rate hike forecast to two from three previously, while HSBC Global Research scrapped its former expectations of a 25bp increase within this quarter. The lender said it expects slower inflation this year at 3.8% versus 5.2% in 2018, which should lessen pressures on the current account (CA).
“Lower oil and food prices provide relief to CA deficit economies like India and the Philippines. In fact, with the Fed also turning more dovish, we have scaled back our BSP rate hike forecast to two rate hikes, instead of three,” analysts at Deutsche Bank said in a report released Friday.
In December, the foreign bank said three rate hikes worth 25bp each would be needed to stabilize inflation, “moderate” the depreciation of the peso and reverse the widening gap in external trade. Now, it sees two increases within the second and third quarter.
These remarks came after the Monetary Board paused its policy tightening cycle, consisting of five consecutive rate hikes from May to November totaling 175bp at a time of surging consumer prices. These brought benchmark interest rates to the 4.25-5.25% range, with the key rate of 4.75% the highest in nearly a decade.
The BSP has said that monetary authorities are almost certain that inflation will claw its way back to the 2-4% target range this year and in 2020, with sharp declines in monthly rates seen since November.
Meanwhile, latest remarks from Jerome H. Powell, chair of the United States Federal Reserve, also signalled a possible pause in rate hikes in the world’s biggest economy, affirming market views that global yields could slip this year.
Deutsche Bank sees the Philippines’ current account deficit narrowing to an equivalent of 2.8% of gross domestic product (GDP), following an expected gap equivalent to 3.3% of GDP in 2018.
The current account, which measures fund flows drawn from goods and services trading, posted a $6.47-billion deficit in the nine months to September. The central bank expects this level to have steadied until December at $6.4 billion, equivalent to 1.9% of GDP, amid a steep import bill.
The BSP projects an even wider current account gap of $8.4 billion, equivalent to 2.3% of GDP, this year as it sees even more imports of raw materials and capital goods for the government’s infrastructure drive.
In a separate report, HSBC Global Research said it does not expect further rate hikes from the BSP, with the Fed seen slowing its own tightening.
Instead, required bank reserves will likely be adjusted at a time of slower money supply growth.
“Less external pressure will also facilitate a less hawkish BSP, allowing it to possibly accelerate reserve requirement cuts to boost liquidity in the financial system,” HSBC said in its regional report.
Money supply grew 8.4% in November, picking up slightly from October’s 8.3%. Previously, liquidity grew at double-digit pace.
BSP Governor Nestor A. Espenilla, Jr. reduced the reserve requirement for big banks by 200 bp last year to 18%, adding that monetary authorities will resume planned cuts once inflation will have significantly eased.
Inflation is expected to remain a “small risk” early this year due to another wave of tax increase for fuel, but should be offset by sharp declines in food and transport costs — enough to bring prices back to target within the first six months.
Monetary officials said they are more comfortable now about inflation, with latest central bank forecast placing the full-year average at 3.2% and at three percent in 2020.
The first monetary policy meeting this year is set on Feb. 7.