Amid an anticipated growth in consumer prices in the country, analysts have expressed mixed views as to what the outgoing Central Bank governor will do when he presides over his last monetary-policy meeting this month.
With inflation on the upward trend in recent months, ING Bank Manila senior economist Joey Cuyegkeng said in his latest assessment of the local economy’s dynamics that inflation is likely to peak in the third quarter of the year.
“Food pressures from tight supply conditions are likely to keep food inflation on an uptrend. Energy prices are also expected to exert some upward pressure,” he said.
Inflation in the country has been steadily and consistently rising since September last year, from the 1.1-percent print seen in April 2016 to 3.4 percent in April this year.
Within target range
Earlier this month, Central Bank Governor Amando M. Tetangco Jr. said May inflation is likely to settle between 2.9 percent and 3.7 percent, as the lower prices of domestic oil and the downward adjustment in electricity rates could exert downward influence on inflation. This, however, could be offset by the higher price of rice, which weighs heavily on the Consumer Price Index (CPI) basket.
Thus, Cuyegkeng said inflation is likely to hit between 3.7 percent and 3.8 percent in the third quarter of the year—the forecasted highest point of inflation for 2017—and averaging at 3.4 percent for the same year.
Amid the foreseen significant rise in inflation in the months of July to September this year, the figures are still well within the government’s target range, albeit nearer the ceiling of its 2-percent to 4-percent projection for the year.
Cuyegkeng said these conditions, coupled with the tamer inflation expectations for 2018, could give the Central Bank more room to maintain policy settings, despite earlier forecasts that the Bangko Sentral ng Pilipinas (BSP) will start hiking its rates this year.
“These expectations argue for steady policy settings. External pressures related to Fed tightening may require BSP policy response to steady some price pressures. We continue to review our 2-percent rate hike base case for BSP. The noninflationary pace of liquidity growth is keeping demand pressures on prices in check for now,” Cuyegkeng said.
‘Pulling the trigger’
With the Fed expected to also normalize its interest rates soon, other economists argue that Tetangco may raise the Philippines’s main policy rate in his last monetary-policy setting on June 22.
In particular, a local analyst said Tetangco may actually pull the trigger in his meeting in June to manage inflation expectations, taking into consideration tighter rice supply and the inflationary effect of tax adjustments pending for approval this year, coupled with the potential Fed rate hike also this year.
Contrary, however, to the stance of local economists, HSBC economist Joseph Incalcaterra said they see the Central Bank maintaining all policy rates on hold for the year despite developments in global monetary policy, as well as in local price movements.
“Market consensus currently suggests that the BSP will hike rates this year to counter the uptrend in inflation. Given the BSP’s history, this appears logical. The Central Bank tends to prefer to keep CPI anchored toward the midpoint of the inflation target, and based on our current estimates, inflation should approach the top bound leading up to August. As such, based on this forecast, the June 22 meeting is likely the only one to be considered live,” Incalcaterra said.
“But we believe the BSP will refrain from hiking rates this year. After all, this inflation cycle is unlike those in years past. Recent year-on-year price momentum is derived from base effects, the lagged impact of higher energy prices—at least through March to April, and some foreign-exchange depreciation…. As such, barring supply shocks, such as weather-induced agricultural disruption, CPI is likely to peak in August and descend toward the 3-percent midpoint in 2018,” he added.
Seeing the difference
The economist further said that this year is different due to the recent evolution of monetary policy, as seen in the rates in the BSP’s Term Deposit Facility, which have generally edged higher over the past year.
This, according to Incalcaterra, already could account for a so-called under-the-table tightening and could eliminate the need for the BSP to actually tighten its main policy rate, which is currently at 3 percent.
As such, HSBC’s stance on the Central Bank’s move for the year is a “no-change” to the policy rates for the entire year.
However, Incalcaterra said they see the BSP even easing some of the settings in the BSP’s toolkit, particularly cutting the banks’ reserve requirement ratio in the second half of the year by 100 basis points.
“We stick to our view that the BSP will allow inflation to come close to 4 percent, given the trajectory mentioned above. Moreover, we believe that once the inflation trajectory is on a descending path, the BSP will cut the RRR by 100 basis points in the second half to complete the interest rate corridor transition,” Incalcaterra said.
“This is not meant to be monetary easing, but the BSP is unlikely to want to confuse markets during a time of increasing inflation, as such it may wait until the second half of the year,” he added.
Upside inflation pressures
In the Central Bank’s last meeting on May 11, the Monetary Board (MB) maintained all its key monetary policy rates unchanged in its third policy-setting meeting of the year, a move widely expected by markets.
Inflation forecasts were also left untouched for this year and the next, as key drivers were said to have “balanced each other out”.
In particular, the rate for the overnight reverse repurchase facility was kept at 3 percent, with the corresponding interest rates on the overnight lending and deposit facilities also kept steady. Reserve requirement ratios were also left unchanged.
The BSP also maintained its inflation forecasts at 3.4 percent for this year and 3 percent for next year, but Tetangco also said the balance of risks surrounding the inflation outlook continues to be tilted toward the upside, driven mainly by the transitory impact of the proposed tax-reform program. Possible further adjustments in transportation fares and electricity rates also contribute to upside inflation pressures.
May 11’s monetary-policy meeting is the second-to-the-last MB meeting of Tetangco as BSP chief.
His last meeting as BSP governor will be on June 22. He is then scheduled to step down in July.
BSP Deputy Governor for the Supervision and Examination Sector Nestor A. Espenilla Jr. will take over as BSP chief.
Image credits: Bloomberg