Rate hike creeps into policy expectations

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By Melissa Luz T. Lopez
Senior Reporter

THE Bangko Sentral ng Pilipinas (BSP) could keep policy rates steady at the meeting this week of its Monetary Board, according to a BusinessWorld poll that nevertheless showed nearly half of respondents expecting a hike this time amid quickening inflation.

Seven of 12 economists asked late last week see the central bank holding on to current borrowing rates, while the remaining five see a quarter-of-a-point increase in the face of faster inflation and another rate hike expected from the United States Federal Reserve this March 20-21.


The BSP’s Monetary Board is scheduled to meet on Thursday for its second policy review for 2018. The body kept rates unchanged at its Feb. 8 meeting, but introduced an “operational” cut in bank reserves that took effect this month.

“I don’t think the Monetary Board will approve a policy rate increase in its March meeting inasmuch as inflation (new base) is still within their target range,” said Victor A. Abola, economics professor at the University of Asia & the Pacific.

Prices of widely used goods rose by 3.9% overall in February using 2012 as the new base year, according to the Philippine Statistics Authority. The pace picked up from 3.4% in January and 3.1% in February 2017 to post a fresh three-year high.

Using the older model based on 2006 prices, inflation surged to 4.5% from the previous month’s four percent to breach the 2-4% target range set by the BSP for full-year 2018.

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines, said he expects the BSP to keep policy on hold despite price pressures from the recovery in oil prices, rising government spending, and the depreciation of the peso.

“While the BSP is likely to hike policy rates this year, the timing is a bit uncertain given that the BSP is firm in its belief that current policy settings are still appropriate, despite market expectations of at least one rate hike this year,” Mr. Dumalagan said.

“Considering the BSP’s dovish remarks recently, it seems that there would not be any rate hike this month. This, however, does not preclude the possibly of a rate adjustment in May 2018.”

BSP Governor Nestor A. Espenilla, Jr. has said monetary authorities do not have to “necessarily react” to February inflation’s pickup, pointing that he is more concerned with the outlook as there is a “long lag” between monetary policy action and its actual impact on the real economy. He added that the inflationary impact of higher levies under tax reform will likely be temporary.

But the same poll showed nearly half of respondents expect a tightening move from the BSP this week.

Michael L. Ricafort of the Rizal Commercial Banking Corp. cited a widely expected rate hike by the US Federal Reserve on top of faster inflation and a weak peso-dollar rate as “major catalysts” that could prod the BSP to raise benchmark rates by 25 basis points (bps).

Markets are all but certain that the Federal Open Market Committee will raise rates at its March 20-21 meeting, on track with normalization that began in December 2015.

DBS Bank economist Gundy Cahyadi went as far as dubbing a BSP rate hike at this time as a “crucial move,” saying the Philippines has fallen behind the curve.

“Even if we factor in a 25bps rate hike every quarter this year, real interest rates may fall to -1% by June 2018, the lowest since end-2014,” Mr. Cahyadi said.

The BSP has kept its policy stance unchanged since a 25bps hike in September 2014. Operational adjustments which took effect in June 2016 brought current rates to 2.5-3.5%.

The analysts polled also expect further cuts in the reserve requirement ratio imposed on big banks, but noted that this decision will rely on prevailing liquidity conditions.