By Melissa Luz T. Lopez, Senior Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) has adopted a hawkish tone towards monetary policy, with another global lender now betting that a rate hike may be on the table as early as next month.
ING Bank N.V. Manila said BSP Governor Nestor A. Espenilla, Jr. may already be setting the stage for a rate hike, versus their previous forecast that interest rates will be kept steady for the rest of 2018.
“The Philippine central bank Governor has turned hawkish; our dovish policy rate outlook is now at risk,” ING senior economist Jose Mario I. Cuyegkeng said in a market report published yesterday.
“The Governor recognized the need for an additional signal — a rate hike. Justification is that rising inflation expectations could lead to second round effects such as demands for higher minimum wages and transport fares.”
More market players are now betting that the policy-setting Monetary Board will finally adjust rates upward as early as their May 10 meeting, saying the tightening move is necessary to rein in inflation.
Prices of widely-used goods and services accelerated to 4.3% in March under the 2012 base year, led by a surge in the prices of cigarettes and alcohol as well as rice, according to the Philippine Statistics Authority. This is the fastest price pickup seen in at least five years which brought the three-month average to 3.8%, close to the high end of the BSP’s 2-4% target.
ING expects full-year inflation to average 4.3%, higher than the central bank’s 3.9% estimate.
Mr. Espenilla has said that the BSP is prepared to “take immediate and appropriate measures” to protect price and financial stability, as he finds comfort in knowing that the local economy can weather the impact of higher interest rates if needed. He previously noted that the central bank will not hesitate to raise rates should inflation turn out to affect more goods.
Monetary Board Member Felipe M. Medalla also said on Tuesday that policy makers will have to “rethink” their stance should inflation risks persist longer, but noted that current expectations do not stand as a “basis for action” in itself.
ING acknowledged that the central bank “has not been idle” over the past month, as its steady presence in the market has allowed a gradual rise in yields in between their rate-setting meetings.
“It (BSP) has been on a stealth tightening path for some time, with its weekly term deposit auctions that have kept M3 at a pace that limits demand-pull price pressures. BSP term deposit rates and government T-Bill rates and bond yields have increased,” Mr. Cuyegkeng said.
“In addition, BSP’s sale of USD in the spot market also cut liquidity while reducing PHP volatility.”
Yields on term deposits climbed by around five basis points across the board this week, while rates fetched for government-issued debt papers also climbed on account of mounting expectations of rate hikes from both the BSP and the United States Federal Reserve.
“Chances of our dovish policy rate view have dropped even as expectations in 2019 show a return to the inflation target range. The market expects a policy rate hike at the May or June meeting,” Mr. Cuyegkeng added.
The BSP has kept its policy stance unchanged since September 2014, except for procedural tweaks introduced in June 2016. Benchmark rates currently range from 2.5-3.5%.