Analysts: MB not done with hiking interest rates
Monetary authorities will likely continue to raise interest rates given the need to temper inflation and despite a softening economy, analysts said.
IHS Markit, Japan’s Nomura, and Fitch Solutions all said an additional policy rate hike could be announced before the year ends, and also possibly in 2019, following last Thursday’s 50-basis point (bps) adjustment — the largest in 10 years.
Inflation, which has topped the Bangko Sentral’s ng Pilipinas’ (BSP) 2.0-4.0 percent target since March, hit yet another five-year high of 5.7 percent in July, prompting the BSP’s policymaking Monetary Board to shift from the 25-bps adjustments ordered in May and June.
Thursday’s 50-bps adjustment took the central bank’s overnight borrowing, lending and deposit rates to 4 percent, 4.50 percent and 3.50 percent, respectively. The last time that monetary authorities increased interest rates by 50 bps was in July 2008, when inflation hit 12.2 percent.
The Monetary Board also raised its inflation forecasts for 2018 and 2019 to 4.9 percent and 3.7 percent, respectively, from 4.5 percent and 3.3 percent previously, and also issued a 3.2 percent inflation forecast for 2020.
Philippine monetary authorities, IHS Markit Asia Pacific chief economist Rajiv Biswas said, are facing the challenge of having to deal with a softening economy and rising inflation.
A second-quarter growth slowdown, to 6.0 percent from the downwardly revised 6.6 percent in the first three months of the year, was not enough to prevent monetary authorities from ordering the 50-bps rate hike.
“With the BSP having hiked the policy rate by 100 bps altogether since May this year, the impact of higher policy rates will also be a moderate drag on GDP (gross domestic product) growth over coming quarters,” he said.
“A key risk to the near-term inflation outlook is from the risk of further rises in world oil prices, which could push inflation higher and force more BSP rate hikes during H2 (second half) 2018 and in 2019,” Biswas added.
He noted that across the Asia-Pacific central banking landscape, the combination of US Federal Reserve rate increases and external account pressures would ensure a continued shift away from accommodative monetary policy settings during the next 12–18 months.
“Through the end of 2019, IHS Markit expects the most aggressive monetary policy tightening among Asean (Association of Southeast Asian Nations) central banks to be from the BSP and Bank Indonesia,” Biswas said.
Nomura economist Euben Paracuelles, meanwhile, said the BSP had clearly left the door open to more rate hikes.
“The more aggressive hike came despite Q2 (second quarter) GDP growth being a lower-than-expected 6 percent,” he said.
Nomura subsequently cut its 2018 Philippine growth forecast to 6.5 percent from 6.9 percent but at the same time maintained its view of another 50-bps increase for the rest of the year.
Fitch Solutions, which also slashed its 2018 outlook to 6.3 percent from 6.5 percent, also said that the Monetary Board was not done with hiking key interest rates.
“Given that the central bank maintained its hawkish tone in spite of lackluster economic performance … we have revised our forecast for the central bank to tighten its policy rate by a further 25 bps to 4.25% before end-2018,” Fitch Solutions said.
Rising inflation expectations and risk aversion were said to be causing the peso to weaken, and while the BSP can intervene to help stabilize the currency, “negative real interest rates and a tightening US Fed suggest to us that further interest rate hikes will likely be needed over the coming quarters to safeguard macroeconomic stability, and this is likely to come at the expense of growth”.
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