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Second rate hike may not be enough to help markets

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PSE bell
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WHILE the Bangko Sentral ng Pilipinas increased its benchmark interest rate for a second month on Wednesday, the action may not be enough to help lift Asia’s worst-performing market, according to some analysts.

Thursday saw the peso, which has lately been hitting 12-year lows against the dollar, 7.07% weaker from end-2017 at P53.46 to the greenback (read article on S2/3) and the Philippine Stock Exchange index down 17.06% year-to-date to 7,098.15 as it entered bear-market territory (story on S2/2).

Lexter A.L. Azurin, assistant vice-president and senior equity analyst at AB Capital Securities, Inc., said the latest increase in benchmark interest rates should ease investor concerns on the peso, which in turn will be good for equities. He noted that one of the reasons for the market selloff in the past few months is uncertainty over the policy environment.

AP Securities, Inc. Research Analyst Rachelle C. Cruz noted that for the equities market, a rate hike is better than no rate hike since the move is meant to calm the market and anchor inflation expectations.

For Ms. Cruz, there’s more room for peso weakness if inflation peaks in the third quarter of this year and the BSP’s Monetary Board does not increase rates at its Aug. 9 meeting. This, she said, will put pressure on the peso and the stock market will remain weak because foreign selloff will continue.

Inflation picked up to a fresh five-year-high 4.6% in May, keeping the year-to-date pace beyond the BSP’s 2-4% full-year target at 4.1%. Overall price hikes, however, have been slowing month-on-month, encouraging state economic managers to say that inflation should fall within target next year. The BSP on Wednesday also tempered its full-year inflation forecast for 2018 to 4.5% from 4.6% previously.




Krung Thai Bank’s Jitipol Puksamatanan said the BSP’s latest interest rate increase will probably only help to stop declines in the peso in the short term, adding that the latest action isn’t enough because the key rate remains below the nation’s inflation.

The move is unlikely to help strengthen the currency, he said, adding that a significant depreciation in the peso would be negative for inflation, while the peso may weaken further to as low as 54.50 in the third quarter.

Divya Devesh Asia FX strategist at Standard Chartered Bank said the second rate hike for 2018 — and in nearly four years — “certainly provides some respite” for the peso, but the currency is likely to continue to underperform due to weak external balances — a condition that is unlikely to change in the short term.

Mitul Kotecha, senior emerging markets strategist at TD Securities, said Wednesday’s policy tightening is not going to buoy the peso much given still relatively low real yields and current-account deficit.

Over the near term, he believes the peso may benefit from some consolidation in risk appetite but the dollar-peso pair is likely to remain in upward trend towards P54 to a dollar as the next psychologically important level.

WHAT’S NEXT?
The jury is also out on what to expect from the BSP in the coming months.

For Andy Ji, FX and Rates Strategist/Asia ex-Japan economist at the Commonwealth Bank of Australia, the Monetary Board could deliver another interest-rate increase this year after the hike on Wednesday, as inflation will probably quicken if the peso remains weak.

But even further hikes will do little to bolster the peso as the United States Federal Reserve is expected to embark on a more aggressive tightening path.

Mr. Ji noted that the peso is more vulnerable than regional peers to higher US interest rates as the Philippines has a more acute inflation problem.

In separate reports, analysts at ANZ Research and Nomura said they see additional tightening moves from the central bank following a back-to-back rate increase during the Monetary Board’s May and June meetings.

“We therefore maintain our forecast that BSP will follow up with another 25bp policy rate hike at its next meeting in August, taking the policy rate to 3.75% this year,” Nomura economists said.

The global bank echoed the BSP’s expectations of inflation hitting its peak during the third quarter, as it bared an estimate for third-quarter inflation at 5.1% coming from a 4.7% average expected for April-June.

The BSP introduced another rate increase as it saw that inflation expectations “remain elevated” for the year, especially given “more volatility” in the exchange rate.

For ANZ economists, “higher crude oil prices and a potential upward revision in minimum wages were seen as the key upside risks.”

“The important thing to watch out would be the magnitude of wage revisions in October, in our view,” they added, noting that the sustained peso weakness may have prompted the BSP to raise rates anew.

The peso has been trading at the P53 level versus the dollar since last week, touching fresh 12-year lows.

On the other hand, HSBC said the BSP’s move may be the last for now.

“We do not see further hikes this year, given easing inflationary momentum,” HSBC economist Noelan Arbis said.

“We still expect headline inflation to peak on a yearly basis in 2H18, but mainly due to base effects and higher oil prices, which we believe aren’t reason enough for additional monetary tightening.” — reports of Bloomberg and Melissa Luz T. Lopez

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