THE central bank will likely keep rates steady this week but may still push on with fresh rate hikes by 2019, Fitch Solutions said in a report.
Fitch Solutions Macro Research said they see the Monetary Board holding fire on interest rates on Thursday, putting an end to five consecutive tightening moves since May. This is in line with market expectations that the Bangko Sentral ng Pilipinas (BSP) will finally have the scope to keep benchmark rates unchanged following hikes worth 175 basis points (bp) in total.
“We believe that the BSP’s 25bps hike in November was a preemptive move to the US Fed’s likely 25bps hike in December. Combined with the recent decline in crude oil prices, this is likely to provide room for the BSP to remain on hold in December, barring any global risk-off event,” the Fitch Group unit said in a report published yesterday.
Inflation dropped to six percent last month from a nine-year peak of 6.7% in September and October, assisted by a sharp drop in world crude prices and food costs. Authorities said this illustrates a “decreasing trend” in the inflation rate, with the month-on-month pace even posting a 0.3% decline to mark the first drop since a steady ascent since the year opened.
Still, Fitch said the central bank can still consider raising rates anew next year, contrary to the view of economists surveyed for BusinessWorld’s poll that the tightening cycle has come to an end.
While inflation has dropped sharply in November, inflation is still well above the 2-4% target band of the BSP and merits more intervention.
“The continued high inflation rate informs our expectation for the BSP to resume its tightening cycle in 2019, with 50bps worth of rate hikes over the year, aimed at bringing prices down to more manageable levels,” the report read.
Prices of widely-used goods have increased by 5.2% from January-November, just below the central bank’s 5.3% forecast for the full year although well above the 2-4% target. Next year, inflation is expected to decelerate to 3.5%, pulled down by the expected drop in rice prices as well as base effects.
Last week, BSP Governor Nestor A. Espenilla, Jr. has flagged the need to “pay close attention” to rising core inflation, which zoomed to 5.1% from 4.9% in October, noting that policy makers will remain “vigilant” to price pressures.
The key policy rate at 4.75% is the highest in nearly a decade. Fitch Solutions sees this rising to 5.25% by end-2019. — Melissa Luz T. Lopez

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