There seems to be a general agreement building up each week that the Bangko Sentral ng Pilipinas (BSP) should recalibrate the policy rates soon because a rates freeze presents stability risks to the economy.
An analysis on monetary-policy dynamics in the Philippines by BMI Research, a think tank operated by Fitch Ratings, bared expectations of a positive adjustment in the policy rates by 25 basis points within year. Colleagues in the industry forecast such adjustments coming no earlier than in the first three months next year, given prevailing monetary conditions. The adjusted forecast is a scale down from an earlier projection of a 50-basis-point increase.
BMI Research said the recalibration was based on more recent signals from BSP Governor Nestor A. Espenilla Jr. indicating continued confidence in the monetary-policy settings.
When it last convened in August 10, the policy-making Monetary Board opted to keep the rate on the BSP’s overnight reverse repurchase window at 3 percent. The corresponding interest rates on the overnight lending and deposit windows, as well as the banks’ deposit-reserve ratios were also left unchanged.
“Although we continue to expect higher interest rates over the coming quarters as inflationary pressures mount and risks of capital outflows intensify, we have now revised our forecast for a 25-basis-point hike this year from 50 basis points previously, and another 25 basis points in 2018, as Espenilla signaled that the BSP is in no rush to tighten monetary policy”.
“Our view still chimes with the Monetary Board’s statement, which highlighted that: ‘the balance of risks to the inflation outlook continues to be on the upside’, and that the BSP will adjust its policy settings as needed to ensure that future inflation stays aligned with the medium-term target of [2 percent to 4 percent],” it added.
BMI Research also warned that, while the BSP may still have sufficient policy space to delay further the inevitable rates hike, freezing them for too long could harm the economy instead.
“While the BSP could certainly keep rates low to facilitate the government’s expansionary fiscal plans, this would risk further capital outflows and jeopardize macroeconomic stability,” BMI Research said.
The BSP also said inflation pressure is similarly ramping up enough to warrant a similar recalibration in forecast inflation to 3.2 percent this year instead of 3.1 percent forecast earlier.
BMI Research actually projected a more threatening inflation path this year,
averaging 4 percent.
Headline inflation averaged only 3.1 percent in the first seven months, with the latest reading in July at 2.8 percent.