BANK of the Philippine Islands (BPI) Lead Economist Emilio S. Neri Jr. said there is a possibility that monetary authorities will pull off another off-cycle rate hike before the year ends.
In his commentary released on Tuesday, Neri said the Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) could hike anew next month even if there is no scheduled MB meeting for October. This is in the wake of the next Federal Open Market Committee (FOMC) meeting in early November, when another 75 basis points (bps) increase is expected.
Should Neri’s prediction be true, this will be the fourth consecutive month that the BSP will hike rates since July. The latest BSP interest rate hike was made effective last September 23 at 50bps to 4.25 percent.
The economist also said that he hopes the next rate hike would not be a repeat of the low rate hike in June when “we were caught between two meetings of the FOMC with a much lower policy rate [adjustment].”
“Because in June, if you remember, the BSP hike [was] by 25bps when the FOMC hike [was] 75,” Neri said.
The economist said in early July, before BSP’s scheduled meeting took place, that US inflation for June was reported to have printed well above expectations, triggering a sharp jump in the dollar-to-peso exchange rates.
“That’s why we were forced to increase by 75bps off-cycle.”
Impact on inflation
COINCIDENTALLY, the peso fell last Tuesday to a fresh all-time low and neared the P59 territory in its exchange against the greenback.
Data from the Bankers Association of the Philippines (BAP) showed that the peso closed the day’s trade with an exchange value of P58.99 to a dollar, weaker by almost half a peso from the P58.5-to-a-dollar rate in the previous day.
In comparison, the peso was valued at P56.42 to a dollar in the beginning of September, putting the loss of value at P2.57 in 18 trading days.
Neri said the country would have a problem if it falls behind on raising interest rates, especially considering the impact of a weaker peso on inflation amid the FOMC’s determination to do sustained, higher, and faster interest rate hikes.
“That’s a problem because while inflation was [the] ultimate target, the currency is an intermediate target, because we all know the weaker peso will have an influence on inflation later on,” he said.
Seen as dovish
ACCORDING to Neri, monetary authorities are “not catching up with the higher, faster, longer signal of the FOMC.”
“Several foreign banks have already mentioned in reports that we are seen as dovish,” Neri continued, citing that a P60-to-a-dollar exchange rate is “just around the corner.”
The economist also warned that a mild policy rate hike might use up the country’s gross international reserves (GIR).
“The only thing that is preventing a 40-percent [to] 42-percent depreciation of the peso now, like in 1997, is probably that we have a GIR at seven months, which we have to be careful not to use up,” Neri said, adding that the country has energy and food security issues to contend with.
“Coal prices are at a record high,” he said, citing the Philippines’s 50-percent energy generation is dependent on coal.
“Winter is about to come and natural gas in Europe is going to get more expensive and so will coal,” Neri said.
“If we don’t hike aggressively enough, the seven months [of GIR] can suddenly revert to six months,” he warned adding that the 7-month GIR should really be preserved.
Look for alternatives
NERI’S advice for businessmen looking to import raw materials is to source elsewhere, other than the US or even China, as the Yuan is very competitive. “Source from Taiwan, Korea, Japan, where the currency is weaker,” he said.
For the Filipino saver, Neri said to look at fixed income.
“They are more reasonable now. They are not being repressed financially,” he pointed out, saying there are no more financial repression with the negative yield rates. “Ten-year yields, five-year yields are now giving more reasonable yields.”
“Now, you can start looking at more attractive yields for a longer tenor,” Neri advised retirees, as opposed to the only choice they had of buying Treasury bills.
“[The] ADB [Asian Development Bank] just came out with a 6.3-percent growth forecast for the Philippines next year,” he said. “So while consumers will be a little bit picky, the economy is looking quite strong.”
“And it has the momentum coming from pent up demand still because of being locked down for more than two years,” Neri added.
Image credits: Bank of the Philippine Islands