By Melissa Luz T. Lopez, Senior Reporter

BSP unlikely to hike rates soon -- analysts

Posted on June 10, 2017

THE BANGKO SENTRAL ng Pilipinas (BSP) has room to delay its monetary policy tightening with inflation on a slowdown and some easing in domestic demand, three global banks said in separate reports.

Economists from ING Bank, Nomura, and Deutsche Bank said in separate commentaries that the BSP will unlikely tweak rates anytime soon, with a hike likely to occur later than what these analysts previously projected.

“We still expect BSP to leave policy rates unchanged at its next policy meeting on 22 June, but now see rising risks of a delay to the policy rate hikes we forecast in H2 2017,” Nomura economists Euben Paracuelles and Lavanya Venkateswaran said in a market report following the release of official May inflation data.

Prices of widely-used goods and services went up by 3.1% in May from a year ago, which moderated from 3.4% monthly readings for April and May. The slower pace observed last month ran counter to the central bank’s forecast that inflation will keep rising and peak sometime during the third quarter.

Food costs saw milder upticks last month which offset higher rice prices, alongside lower utility and fuel costs.

For the first five months, inflation averaged at 3.1%, roughly at the middle of the BSP’s 2-4% target band but still below the 3.4% estimate for the full year. In 2016, inflation settled at 1.8%.

“We may have already seen the peak of inflation earlier this year,” added ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng, pointing out that electricity rates and world crude prices are likely to sustain a downward trend over the coming months.

“Monetary policy could be steady for the rest of the year,” Mr. Cuyegkeng said, noting that he once pencilled in two 25-basis-point (bp) rate increases from the BSP during the second semester. “The moderation of inflation and expectation that inflation would remain within the 2-4% target range over the policy horizon and in 2019 argue for steady settings. The assumption is that US monetary tightening would remain gradual.”

The BSP has kept its policy stance unchanged since a hike in September 2014, with analysts not expecting any adjustments during the June 22 policy review. Meanwhile, the United States Federal Reserve will hold its rate-setting meeting next week, where analysts expect a second 25-bp hike for the year.

On the other hand, Deutsche Bank pointed out a mild deceleration in domestic activity compared to the surge seen in 2016, having been an election year. The German bank said there was some slowdown in purchases of durable equipment and public spending, while geopolitical tensions and terror attacks also stand as sources of concern.

“These headwinds alongside the decline in inflation in May, could give the BSP room to delay rate hikes (say, for another month), a key risk to our August call,” economist Diana del Rosario said. “But provided that growth remains buoyant and inflation elevated (i.e. above 3%), we are still keen to believe that the BSP will hike the policy rate at least once in the latter half of the year to guard against the demand-induced inflationary impact of the tax reform, of which the first package would involve substantial cuts in personal income tax rates.”

Deutsche Bank also said that the 2018 implementation for the first tranche of the tax reform plan is likely doable, now that the bill only needs to clear the Senate after the House of Representatives approved the measure last month.

Deutsche Bank expects full-year economic growth to log at 6.2%, slower than the 6.9% pace in 2016.