PHL economy seen to withstand further tightening

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THE ECONOMY can withstand further policy tightening from the Bangko Sentral ng Pilipinas (BSP), even as it fired off its strongest response in a decade last month, according to the minutes of the Monetary Board meeting.

“The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce the risks to inflation, including those emanating from the ongoing normalization of monetary policy in advanced economies and its impact on the foreign exchange market, and bring inflation toward a target-consistent path over the medium term,” read the highlights of the Monetary Board’s Aug. 9 policy meeting.

“Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings.”

The BSP raised its benchmark rates by 50 basis points (bp) at its Aug. 9 meeting to rein in inflation expectations over the medium term, and prevent sustained supply-side price pressures from driving further second-round effects.

This was after back-to-back 25-basis-point hikes each in May and June.

Latest Philippine Statistics Authority data showed the rise in prices picked up to 6.4% in August from 5.7% in July and 2.6% a year ago, bringing the year-to-date average to 4.8% — above the central bank’s 2-4% target.

BSP Governor Nestor A. Espenilla said on Wednesday that the August print will “warrant more decisive non-monetary measures” to mitigate the impact of supply-side factors on inflation.

Meanwhile, gross domestic product (GDP) grew 6% in the second quarter, below analysts’ estimates, from 6.6% a year ago and in the first quarter this year, closing at a 6.3% expansion in the first semester versus 6.6% in the comparable period in 2017.

The Monetary Board said the 6% growth “reflected the continued strength in domestic economic activity.”

The BSP forecasts a 4.9% inflation rate for this year, and 3.7% for 2019, and a preliminary 3.2% for 2020.

It noted that inflation expectations remained elevated, citing its July survey that showed a 4.7% median forecast from private sector economists for 2018 from 4.5% in its previous survey, 3.9% for 2019, from 3.8% previously, and a steady 3.8% for 2020.

Moreover, the Monetary Board said “risks to future inflation remained on the upside.”

These additional wage adjustments and transport fare hikes due to the increase in excise taxes on petroleum products, elevated global oil prices, higher electricity rates, faster-than-expected monetary policy normalization in advanced economies, and the proposed increase in the National Food Authority’s buying price of rice.

“Meanwhile, the slower global economic growth due to protectionist policies in advanced economies and geopolitical tensions along with the proposed reform in the rice industry involving the replacement of quantitative restrictions with tariffs and the deregulation of rice imports are seen as the main downside risks to inflation,” it said.

Meanwhile, a global bank said the central bank needs to hike its interest rates further at their next policy meeting to dampen inflation expectations, as robust economic growth comes “at a cost.”

In a media briefing on Thursday, Credit Suisse Managing Director and Chief Economist for Asia Pacific Ray Farris said the BSP will likely raise its benchmark rates by another 50 bps during its Monetary Board’s meeting on Sept. 27.

“We see a reasonable chance the BSP will want to send a signal to the markets that they recognize that the inflation is too high and it wants to ensure that it will come back under control by raising rates faster,” Mr. Farris told reporters yesterday. “We see a good chance for a 50-bp rate hike.”

The Swiss financial giant added that in the next 12 months, the central bank will likely hike rates by another 75 bps, taking key borrowing costs to a 4.25-4.25% range.

Mr. Farris said there is a need for monetary tightening to bring down core inflation and control expectations.

Mr. Farris noted that strong Philippine economic growth “came at a cost,” as they view current monetary policy settings to be a “little bit too easy” and credit growth as a “bit too strong.”

Aside from elevated inflation, another “consequence” of robust growth is the deterioration of trade and current account balances, which is creating some vulnerability in the peso, he said.

The peso has been treading the P53-to-a-dollar level for the past few weeks, sinking to a fresh 12-year low on Wednesday as it closed at P53.55 versus the greenback.

Should the central bank tighten, which could temper money and credit growth, Mr. Farris said inflation will slow to fall within the government’s 2-4% target or even lower by the middle of next year.

“You’re not really sacrificing growth because if you want to maximize growth over long periods of time, you need to keep inflation stable and low,” he said. “As that growth slows a bit, it should also reduce import demand which will help improve trade balance and help improve stability in the currency.”

Credit Suisse expects Philippine GDP to expand by 6.3% this year and 6.5% the following year, missing the government’s 7-8% economic growth target for 2018-2022. — Elijah Joseph C. Tubayan and Karl Angelo N. Vidal