Economists are convinced the Bangko Sentral ng Pilipinas (BSP) will deliver a rate hike at the rate-setting meeting of the Monetary Board in March, soon after inflation expectations this year were recalibrated upward due to the impact of tax reforms and of higher oil prices and key food items.
In separate commentaries, BMI Research and Singapore’s DBS Bank said that while the monetary authorities kept the key monetary policy rate unchanged at the meeting, recomputed forecast inflation averaging 4.3 percent this year should compel them push them finally to make the adjustment in March. Such an adjustment results from keeping a steady hand over the policy rates for three years.
“The BSP maintained the status quo at its meeting on February 8, but we believe that the window for further rate hold is quickly narrowing. Inflation is at the top of the target range of 2 [percent] to 4 percent and is likely to head higher if nothing is done,” BMI Research said in a note to clients.
The January inflation survey at 4 percent stood at the limit of the government’s 2-percent to 4-percent target range this year. The recalibrated forecast inflation of the BSP surprised markets as this meant the target would likely be reached this year.
DBS Bank said the BSP’s reluctance to raise the policy rates suggests its tolerance for a weaker peso but argued this stance was not likely to last.
Last Friday, the day after the BSP’s first policy meeting for the year, the exchange rate stood at the close of trading at P51.48 per dollar, or 17 centavos weaker than closing rate of P51.31 per dollar last Thursday.
“We reckon the BSP is prepping the market for a potential rate hike at its next meeting on March 22,” economist Gundy Cahyadi at DBS Bank said.
“While a weaker currency is arguably supportive of export growth, domestic demand has been the dominant force behind the strong GDP growth in recent years. Excessive peso weakness may become a huge drag on domestic investment growth, given the significant need for capital goods,” Cahyadi said.
“Given the need for caution on the exchange rate, the BSP’s preferred option will probably raise its policy rates,” he added.
Going forward, the BSP recomputed its forecast inflation forecast to 3.5 percent, from 3.2 percent at the December price review.
Officials emphasized that, despite the above 4-percent forecast inflation this year, the accelerated rate was caused by supply-side factors and transitory in nature.
“Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices,” BSP Governor Nestor A. Espenilla Jr. said in a written statement.
“The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary policy stance continues to support price and financial stability,” he added.