The Bangko Sentral ng Pilipinas (BSP) has, for quite a while, been maintaining its policy rates on hold, meeting after meeting. This is in the midst of volatilities and diversified monetary-policy direction across the region and even the world.
However, after about three years of status quo, the Central Bank is now in the middle of transitioning to higher monetary-policy rates, as analysts forecast a rate hike from the policy-making board before the year ends.
The Monetary Board last moved its policy rate in its September 2014 meeting, where the board decided to increase the key policy rate by 25 basis points, in an effort to curb price pressures for the coming year.
The BSP said its decision then was based on its assessment that the inflation target for the following year was at risk, and the balance of risks to its then-inflation outlook leaned toward the upside. These price pressures emanated from the possible increases then in food prices, as a result of tight domestic-supply conditions. Pending petitions for adjustments in utility rates and potential power shortages were also part of the looming price pressures that drove the BSP to raise its rates.
Inflation then averaged at 4.4 percent in the first nine months of 2014—sitting near the upper end of its inflation target range then. The BSP’s worry, however, was inflation overshooting its lowered target of 2 percent to 4 percent starting in 2015.
Since its last rate hike, inflation has effectively gone down to 3.7 percent the next month, and 2.7 percent at the end of 2014.
In 2015 inflation peaked at 2.5 percent in February—with inflation not exceeding 3 percent over the past two years. In particular, the growth of prices of goods and services averaged only 1.4 percent in 2015 and 1.8 percent in 2016.
However, at the start of 2017, inflation started to creep up to the 3-percent territory, with February inflation at 3.3 percent. Inflation hit its peak of 3.4 percent in March, April and September this year.
Also, Central Bank officials have admitted that while inflation is projected to fall within the 2-percent to 4-percent target range of the government, the balance of risks to the inflation path is still skewed to the upside, citing the proposed tax-reform program as a development that may exert potential transitory pressures on prices in the country.
Rate hike inevitable
Thus, a rate hike before the year ends may be inevitable for the Central Bank in order to preemptively curb excessive inflation, as the institution did in 2014.
ING Bank economist Joey Cuyegkeng said the central bank will most likely pull the trigger in its December policy meeting, with a 25-basis-point hike to its key monetary-policy rate. This will effectively increase the current 3-percent main policy rate to 3.25 percent.
Aside from the rising inflation, Cuyegkeng said the BSP needs to preemptively address rising money supply and loan growth in the country—both preludes to a potentially overheating economy.
“We continue to expect that the BSP may need to implement a preemptive tightening at the December meeting to head off overheating in the economy. This would also address the need to possibly reanchor inflation expectations while preserving interest-rate differentials in the wake of a likely Fed [Federal Reserve] rate hike,” Cuyegkeng said.
Latest data from the Central Bank show liquidity circulating in the local stream accelerated to 15.4 percent in August, above the 9-percent to 12-percent estimate of the BSP and the so-called sweet spot of cash-supply growth at 10 percent to 15 percent. The sweet spot of cash-supply growth indicates a liquidity expansion that is not expected to stoke inflationary pressures.
Loan growth, meanwhile, hit about 20 percent in August from 19.7 percent in July.
“…These developments add to a growing list of data indicating possibly beginnings of overheating. The list includes imbalances—deterioration of the trade deficit and current account, acceleration in fiscal spending and wider deficit. Rising inflation is also an indicator,” Cuyegkeng said.
“If the M3 and loan-growth rates continue with the uptrend, then these would argue for a risk-management move, a pre-emptive tightening. We continue to expect a preemptive tightening at this year’s last BSP-MB monetary-policy meeting in December,” the economist continued, citing the Central Bank has already started to tighten macro-prudential reporting of loan exposure by requiring a more granular reporting of loan subsectors that experienced high growth.
3% still appropriate
Despite mixed views among economists, the Central Bank governor—who has just assumed office in July this year—has not given any signal yet as to when the BSP plans to hike its rates.
BSP Governor Nestor A.Espenilla Jr. argued that inflation is still on track and macroeconomic fundamentals remain intact.
“We have often been asked why we have not yet raised policy rates given that inflation is trending higher this year and also given the signaling of monetary-policy normalization in the advanced economies, particularly in the United States,” Espenilla said.
“Based on latest estimates by the BSP, average annual inflation in 2017 to 2019 will settle at around 3.2 percent, just above the midpoint of the target band of 2 percent to 4 percent. This within-target inflation outlook essentially drives our policy decision. The independent inflation forecasts of the IMF and the private sector are also broadly in line with our own estimates,” he added.
The governor continued to say that the BSP expects the combination of high growth and low inflation to be sustained on the back of the economy’s rising productive capacity and prudent conduct of monetary and fiscal policy.
Espenilla also lauded the banking sector’s reforms, putting it on a “very sound footing” and continues to be a “stable anchor for the economy”.
Externally, the governor said the exchange rate, albeit weaker, is stabilized and dollar reserves are more than ample to support the country’s balance of payments.
“Given this very positive backdrop, continuity is not only wise, but necessary. Rest assured the BSP shall stay committed to the sound conduct of its core functions—namely, monetary policy, banking supervision and improvement of the payments system,” Espenilla said.
The BSP has two more meetings for the year, one on November 9 and the last meeting for the year on December 12.
In a report of Bloomberg, the World Bank said Malaysia, and to a lesser degree Indonesia, Thailand and the Philippines, remain more exposed to exchange-rate risk than other developing economies in East Asia and the Pacific, as global financial conditions tighten.
Companies and banks in these countries have sizable external debt, although foreign-exchange reserves currently appear adequate, the Washington-based multilateral lender said.
Monetary authorities need to be prepared to tighten their policy stance if capital outflows prompt currency weakness. In the case of depreciation pressures in China, authorities should allow greater adjustment through relative prices and closely monitor financial sector vulnerabilities as monetary policy further tightens, the bank noted.
Growth in the region will continue to benefit from an improving global environment and strong domestic demand, the World Bank said, raising its forecasts for China, Malaysia and Thailand for 2017 and 2018, compared with estimates published in April. China is seen expanding 6.7 percent this year and 6.4 percent next year.
Most Asian currencies have surged against the dollar this year as stronger growth prospects lured inflows.
Some of the growth risks highlighted by the World Bank include budget deficits, which remain high or are expected to rise in most countries over 2017 to 2019; uncertainty about economic policies in some advanced economies; and the escalation of geopolitical tensions.
“What policy-makers need to do is not be lulled by the fact that it’s been a good period for the global economy,” Sudhir Shetty, chief economist for the World Bank’s East Asia and Pacific region, said in an interview with Bloomberg TV.
Officials need to look for ways to mitigate some of the vulnerabilities that have built up even as the region is generally well prepared, he said. With Bloomberg News
Image credits: Ed Davad