BMI sees two BSP rate hikes with inflation at top of target range

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BSP-Bangko Sentral ng Pilipinas

INFLATION will likely top the government’s target range this year amid higher commodity prices and rapid credit growth, which could force the Bangko Sentral ng Pilipinas (BSP) to raise rates twice this year to keep market rates and the peso competitive.

“We are forecasting inflation to average 4% in 2018 and this means that real interest rates will dip into negative territory,” BMI Research said in its February report.

If realized, this would be the highest yearly average since the 4.1% tallied in 2014. It would also hit the ceiling of the 2-4% target band set by the central bank, and will surpass the 3.4% estimate given by the monetary authority.

“With the Fed set to continue on its rate hiking cycle, flagging three more possible 25bps (basis points) hikes in 2018 at its December meeting, we believe that the BSP is likely to tighten monetary policy in the coming months in an effort to safeguard currency and macroeconomic stability,” the Fitch unit added.

The Philippine Statistics Authority will report January inflation data today. A BusinessWorld poll among 14 economists yielded a 3.5% median forecast, which will pick up from December’s 3.3% and the 2.7% reading in January 2017.

The peso has also once more weakened past P51 against the dollar.

The policy-setting Monetary Board will conduct its first review of interest rates on Thursday. Analysts broadly expect the BSP to stay on hold, but some are expecting a more hawkish tone from the central bank to set the stage for a rate hike in succeeding meetings.

“Although headline inflation has been anchored within the central bank’s target of 3±1%, we maintain our view that the current monetary policy stance is too loose and has already started to result in a build-up of economic distortions with credit growth surging and core inflation on a sustained uptrend,” BMI said.

The research firm is pencilling in two rate hikes from the BSP in 2018 amid rising inflationary pressures, at a time of rising global crude prices coupled with higher taxes under the Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect Jan. 1.

TRAIN imposed an additional P2.50 excise tax per liter of diesel and P3/liter for kerosene, which came at a time of three-year highs for world crude prices.

The new law also introduced additional taxes on cars, coal, sugar-sweetened drinks and a host of other items that likely drove up prices of other widely used goods and services, which economists pointed as the reason for the faster increase in prices.

BSP Governor Nestor A. Espenilla, Jr. said last week that the upward inflation trend remains within expectations, but noted that monetary authorities are “carefully assessing” second-round effects of TRAIN on inflation.

The BSP has said it will remain “data-driven” in setting policy rates, with domestic inflation as its biggest concern. — Melissa Luz T. Lopez