Analysts widely expect rate hike pause

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The central bank and analysts are now watching core inflation -- which strips out volatile energy and food prices -- that increased to 5.1% November from 4.9% in October even as headline inflation slowed to six percent last month from September’s and October’s nine-year-high 6.7%.

By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) may finally take a breather and keep benchmark interest rates steady this week, analysts said in a BusinessWorld poll, agreeing that inflation seems to be on its way down.

All but one of the 12 economists asked last week said that the Monetary Board will hold off further policy rate increases after five consecutive tightening moves since May.

The BSP will hold its eighth and last policy review for 2018 on Dec. 13. So far, benchmark rates have risen by a total of 175 basis points (bp), with the key rate now at a nine-year high of 4.75%.

“We believe that the Monetary Board will keep policy settings unchanged in its Dec. 15 meeting. The November print confirms that, after 10 straight months of accelerating, headline inflation has taken a turn and is likely to head back to target by next year,” said Emilio S. Neri, Jr., lead economist at the Bank of the Philippine Islands.

Headline inflation slowed to six percent last month from a nine-year-high 6.7% in September and October, helped by a sharp drop in world crude prices and food costs as supply normalized.

The Philippine Statistics Authority had said that November data affirm a “decreasing trend” in inflation rate, with the month-on-month pace even posting a 0.3% decline to mark the first drop after a steady ascent since the year began.

Economic managers of President Rodrigo R. Duterte expect inflation to “stabilize further” going into 2019.

Shashank Mendiratta, economist at ANZ Research, said he expects the BSP to steady rates as price pressures from food and oil are “finally dissipating,” adding that inflation outlook now looks “benign.”

Prices of widely used goods increased by 5.2% in January-November, just below the central bank’s 5.3% forecast for the full year though above the 2-4% target range.

Next year, the central bank expects inflation to decelerate to 3.5%, pulled down by lower readings, especially in the second half.

However, one analyst said there may still be a chance for another rate hike this week. DBS economist Masyita Crystallin said a faster core inflation rate — which strips out volatile prices of energy and food — may prompt the BSP to take action. “Philippines real rates are still the lowest among peers, so we think several more rate hikes between December and mid-2019 is likely,” Ms. Crystallin added when sought for comment.

BSP Governor Nestor A. Espenilla, Jr. last week cited the need to “pay close attention” to rising core inflation, which zoomed to 5.1% from 4.9% in October.

Interest rate hikes from the central bank are meant to temper inflation expectations that have been a key driver of faster overall price increases since the year began.

On the other hand, some analysts expect that the “proactive” 25bp hike announced last month would be the last from the BSP. They see monetary policy makers now looking out for the right time to reverse and introduce rate cuts some time in 2019.

“If the economy continues to stabilize next year (inflation rate and exchange rate), we might see interest rate cuts by 25 basis points,” said Mitzie Irene P. Conchada, associate dean at the De La Salle University School of Economics.

Benchmark rates have risen sharply coming from a 2.5-3.5% range over the last two years.

Economics professors Alvin P. Ang and Victor A. Abola both expect the BSP to wait for inflation to settle below four percent before a rate cut is introduced, while bank analysts Ruben Carlo O. Asuncion and Nicholas Antonio T. Mapa said a fresh reduction in bank reserves may come first.

Reducing the mandated bank reserves will free up more cash into the financial system, as lenders can now deploy more funds for lending and investments.

The RRR is currently at 18%, down from 20% previously after two cuts that took effect earlier this year. Mr. Espenilla wants the level to drop to single-digit by 2023.