Expectations of another interest rate hike mount

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A FOURTH successive tightening move may be announced by the central bank next month, a global bank said, as it sees inflation topping six percent until September.

“We believe that inflation could breach six percent in the next two inflation reports. If our view is correct then further tightening is likelier,” ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said in a report published on Monday.

The Bangko Sentral ng Pilipinas (BSP) has adopted three rate hikes in a row this year in the face of surging inflation.

Benchmark yields have risen by a cumulative 100 basis points (bp) from May to August as policy makers sought to rein in inflation expectations, in an attempt to temper future price increases for basic goods and services.

Inflation leaped to a fresh multi-year high of 5.7% in July, and the central bank sees the year-on-year pace of overall price increases even faster this month. BSP Governor Nestor A. Espenilla, Jr. said on Friday that August’s inflation rate will likely be higher, even as he clarified it will not go beyond six percent.

July marked the seventh straight month that inflation quickened and the fifth consecutive month that the pace pierced the central bank’s 2-4% target range for full-year 2018.

Mr. Cuyegkeng noted that monetary policy makers remained hawkish in their Aug. 9 meeting as they signalled readiness to tighten rates further as needed. He took it as a hint that another rate hike is on the table later in the year.

“We expect the tightening to continue with another 25bps hike as early as the September meeting or as late as the November meeting,” the bank economist said.

“We continue to see upside risk on the inflation front, especially with the latest reports of rice prices continuing to rise while supply-related constraints also compounding the pressures.”

Prices have climbed by an average of 4.5% during the first seven months, well above the central bank’s 2-4% target for 2018. The BSP has raised its full-year inflation forecast to 4.9%, with the fastest pace expected to be logged this quarter.

In turn, the BSP’s hawkish stance is seen to support the peso, which has been trading weaker versus the dollar.

ING Bank said the effect of the aggressive 50bp rate hike announced by the central bank during its Aug. 9 policy meeting has “worn off,” but markets are holding on to hints that the BSP may hike further.

Most emerging market currencies, including the peso, came under pressure last week amid contagion fears over Turkey’s crisis, which saw a huge sell-off of the lira and sowed investor aversion towards emerging markets as an asset class.

A wider trade gap is likewise keeping the peso on the defensive following a 4.5% slip in remittances in June, ING said. These dollar inflows have been a source of strength, fueling household spending that contribute nearly 60% to the country’s economic output and offsetting an outflow of greenback due to heavy importation. — Melissa Luz T. Lopez