BSP seen introducing back-to-back rate hikes

By Melissa Luz T. Lopez
Senior Reporter
THE Bangko Sentral ng Pilipinas (BSP) will have to introduce back-to-back rate hikes as inflation is seen to trend higher, with a global bank betting that prices will peak close to 6% by August.
Standard Chartered Bank said they expect tightening moves from the central bank to be introduced today and on June 21, or two successive increases worth 25 basis points each. If realized, this will bring the current three percent benchmark rate to 3.5% by midyear.
Rate hikes by the Monetary Board are expected to rein in inflation, which has so far trended above the central bank’s 2-4% target. The cost of basic goods has risen by 4.1% for the first four months using 2012 prices, faster than the 3.9% full-year average forecast given by the BSP in March.
“We believe inflation will continue to rise through 2018, edging close to 6% in August, before moderating,” economists Chidu Narayanan and Divya Devesh said in a report yesterday.
The global bank sees full-year inflation averaging 5.2% under the 2012 base year, a leap from the 4.5% previously expected. For 2019, the rate is seen clocking in at 4.9%.
The lender sees higher taxes on fuel putting the biggest pressure on prices, and with second-round effects expected to kick in during the second half of 2018 as transport prices rise. Higher food costs will also feed into overall inflation.
BSP Governor Nestor A. Espenilla, Jr. last week acknowledged that inflation may have “spread somewhat” to cover more goods, against the previous observation that price increases were largely due to higher taxes imposed on oil, alcoholic drinks and cigarettes under the tax reform law.
The bank analysts took this as a hawkish tone from the central bank, saying the monetary authority is now signalling it will finally flex its muscle in order to rein in inflation.
“We expect the central bank to raise policy rates as early as at its May 10 meeting, hiking the overnight borrowing rate to 3.25% from 3% currently, followed by one more in June,” Messrs. Narayanan and Devesh said.
“Rising inflation will cause monetary conditions to loosen further, forcing the BSP to hike rates again…”
The central bank last raised key policy rates in September 2014, when inflation was trending above the 3-5% target that year. Benchmark rates currently range from 2.5-3.5% following some procedural adjustments introduced in June 2016.
“The central bank is likely to pause after two successive rate hikes, to evaluate its impact. Inflation is likely to moderate in Q4, providing some comfort to BSP and reducing the risk of further tightening,” the report read.
“A likely bottoming out of the current account, combined with a weaker USD, is likely to cap currency depreciation, reducing the pressure on BSP to hike.”
Markets have already priced in a rate hike this week, which has supported the peso in recent weeks, the bank economists said. A more hawkish tone from central bank officials as well as a higher inflation forecast for 2019 this afternoon would “increase the likelihood of a second rate hike in June,” they added.