There is a growing consensus for the Bangko Sentral ng Pilipinas (BSP) to begin reining in the policy rates or, at the very least, signal a tightening bias, as the economy needs the stabilizing hand of the Central Bank in the months ahead.
Following the decision to keep the policy rates frozen yet again at last week’s final monetary board meeting for the year, analysts at ING Bank Manila and BMI Research said the BSP should tighten its grip on the policy rates soon to complement developments in the economy.
BMI Research, the research arm of the Fitch Group, for instance, said rate adjustments help ensure macro stability across the Philippines.
“Although inflation is still within the Central Bank’s target band of [2 percent to 4 percent], we note that price pressures have been mounting, and current interest rates are insufficient for an economy that is growing at around 10 percent in nominal terms,” BMI said.
“The risk is that, if interest rates are kept too low for too long, malinvestment may start to accumulate in the economy. We continue to expect the BSP to hike interest rates by 50 basis points over the coming months, as inflation continues to trend higher and as the US Fed remains on the path to interest-rate normalization,” Fitch Rating’s research unit said.
The BSP last tweaked the policy rates in September 2014 when the policy-making Monetary Board raised the rate at which it borrows from or lends to banks by 25 basis points to keep inflation from shooting past the target range.
So-called operational adjustments were adopted in mid-2016 as the BSP embraced a new system of monetary-policy implementation in the form of an interest-rate corridor that helped push the policy rate to where it is at present.
“We are of the view that the current low interest and inflation environment is unsustainable and, eventually, one or the other will have to rise,” BMI analysts said.
“With interest rates likely to head higher in the US, which could result in capital outflows, we believe that the BSP will likely look to hike interest rates preemptively to prevent further peso weakness, which is already one of the worst-performing currencies in Asia year-to-date,” the analysts quickly added.
In a separate commentary, the senior economist at ING Bank Manila also stressed the need for a tightening action, particularly in 2018.
“We fear that higher prices may generate instability in inflation expectations, requiring some tightening action from the BSP in 2018. We are in line with the consensus forecast of two 25 basis point-rate hikes in 2018. We believe the BSP may hike rates in the second quarter and in the fourth quarter,” Joey Cuyegkeng said.
At the rate-setting meeting of the Monetary Board on November 9, BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo told reporters there is very little to no reason to change monetary policy at this point, no matter the tightening bias of other central banks, particularly the US Federal Reserve (the Fed).
“We have difference economic and business cycles, and adjustments in monetary policy by the US Fed does not necessarily warrant a corresponding response of monetary policy from the BSP,” Guinigundo said, adding quickly the BSP only makes monetary-policy adjustments on the basis of the outlook on inflation, the extent of domestic demand, as well as credit and liquidity conditions.