BSP rate hikes not enough – BMI
Two Bangko Sentral ng Pilipinas (BSP) policy rate hikes will not be enough to contain inflation and support the peso moving forward, BMI Research said.
“We expect the BSP to hike interest rates by a further 25bps to safeguard macroeconomic stability, which will take the benchmark RRP (overnight reverse repurchase) rate to 3.75 percent by end-2018,” the Fitch Group unit said in a report.
The central bank’s policymaking Monetary Board has so far raised key interest rates by a total of 50 basis points over May and June, bringing the BSP’s overnight borrowing, lending and deposit rates to 3.5 percent, 4.0 percent and 3.0 percent, respectively.
BMI said the cumulative hike was largely in line with expectations, adding that it came at a time when global monetary conditions are tightening and domestic inflationary pressures continue to mount.
However, it noted that the move was not enough given inflation, which has been on an uptrend since December 2017, and that May’s 4.6 percent result was the highest since November 2011.
“While part of the inflation was caused by the tax reform program, which has pushed up the prices of basic goods and fuel through the imposition of excise taxes, other key contributing factors also include rising global oil prices and higher aggregate demand,” BMI said.
With this, the research firm raised its headline inflation forecast for 2018 to 4.5 percent, from 4 percent previously, but noted that this was contingent upon the central bank continuing its rate hiking cycle.
“Indeed, core inflation has also been rising steadily to 3.6 percent y-o-y (year-on-year) in May, from 3.5 percent y-o-y in April and 3.4 percent y-o-y in March, and we are not convinced that the BSP’s 50 bps rate hike so far would do enough to dampen aggregate demand,” it claimed.
The Fitch Group unit believes that the Bangko Sentral will likely be compelled to hike interest rates further in the coming months to support the peso as the US Federal Reserve continues its interest rate normalization path.
It also noted that the escalation of trade tensions between the US and China, as well as an increasingly hawkish Fed, was weighing on emerging market assets as risk aversion gripped global financial markets.
“Philippine assets are bearing the brunt of this capital flight to safety with the PHP (Philippine peso) being the worst performing Asian currency, having sold off by more than 6 percent year-to-date…,” BMI said.
The Fitch Group unit’s forecast runs counter the views of banking giant HSBC and London-based research consultancy firm Capital Economics, which have both said that the BSP would not need to hike interest rates further this year.
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