While change has come for the Bangko Sentral ng Pilipinas, as seen in the transition of leadership from the two-termer BSP Governor Amando M. Tetangco Jr. to the new Governor Nestor A. Espenilla Jr., one thing remains unchanged for the Central Bank—its policy stance.
For the entire 2017, the BSP Monetary Board decided to keep its monetary-policy rates unchanged no matter where global and local economic headwinds sail.
In its last policy meeting for 2017, the BSP decided to keep the 3-percent rate on its overnight reverse repurchase facility—a rate which has been in place since the monetary authority’s transition to the Interest Rate Corridor in mid-2016—with unchanged settings on corresponding interest rates on overnight lending and deposit facilities.
The much-talked about reserve requirement ratio of banks was also kept steady at 20 percent.
The BSP also maintained its inflation forecasts unchanged from its last meeting, at 3.2 percent for this year, 3.4 percent for 2018 and 3.2 percent for 2019. All forecasts are within the BSP’s target range of 2 percent to 4 percent.
BSP officials said there is no need for a policy shift to tighter conditions, particularly in the near-term, as inflation remains steadily cruising within target and domestic growth remains in check.
ING Bank Manila senior economist Joey Cuyegkeng said the tame inflation gives the BSP a reason to keep policy settings steady for as long as it can.
However, several economists are concerned about the pending rise in the increase in consumer prices, which could lead to the BSP hiking key rates next year.
“Eyes are on the BSP’s handling in inflation control while preserving economic growth momentum. Going forward, given likely inflation pressure from tax reforms, higher oil prices and the weaker currency, as well as from buoyant domestic demand, consumer price trends and the way the Central Bank controls the situation would draw our attention,” Japan-based credit watcher Ratings and Investment Information Inc. (R&I) said.
International think tank BMI Research also said the BSP is set to start its tightening bias in 2018 on account of rising inflation, among other issues that need addressing.
“Inflation is likely to face upside pressures from strong credit growth and higher commodity prices amid a strong economic growth environment,” BMI Research said.
“With the peso already one of the worst-performing currencies in the region—depreciating by 2.1 percent against the US dollar in the first 11 months of 2017—and the US Federal Reserve [the Fed] set to continue on its rate hiking cycle, the Central Bank is, therefore, likely to tighten monetary policy in an effort to safeguard macroeconomic stability,” it added.
Cuyegkeng forecasts a rate hike as early as in the second quarter of 2018.
Singapore-based DBS Bank also said a tighter monetary policy is needed not only to ensure long-term growth momentum, but also to provide support to Philippine bonds.
“Worries about external funding and rising price pressures have increased the term premium and led to peso weakness over the past few quarters. The Bangko Sentral ng Pilipinas has thus far resisted raising rates, but leeway to do so is limited. A tighter monetary policy stance to address overheating risks may actually provide support for bonds,” DBS Bank said.
“Longer-term growth sustainability is key and a tighter monetary policy stance is warranted, in our view. As the government continues to ramp up its investment spending, excessive credit growth will be increasingly a risk,” it added.
Should the BSP decide to pull the trigger and deliver its first rate hike in years, the local monetary authority will be riding the wave of higher interest rates in the region, as its neighboring counterparts are also expected to tighten monetary policy in 2018.
“Monetary policy will likely be less accommodative in a number of major Asian economies over the course of 2018. We expect central banks in Malaysia, the Philippines, Thailand, South Korea and Taiwan to raise their benchmark policy interest rates over the coming months as inflationary pressures rise and to ensure macroeconomic stability,” BMI Research said.
“Obviously, there’s a need to manage or address domestic macro issues, especially that the pressure of the peso has skewed to the situation that the current account has shifted from surplus to deficit, as well, effects of inflation, which is actually moving on an upward trend,” Maybank economist Suhaimi Ilias said.
Ilias said the Philippines may follow the trend of higher interest rates, starting with the United States delivering a total of 75 basis point increase for 2018.
The Maybank economist also said the Philippines’s neighbors are set to raise rates, as well, in 2018. He projected that the Indonesian Benchmark Policy Rate would go up to 4.5 percent, from the current 4.25 percent. Thailand’s is seen to rise to 1.75 percent next year from the current 1.5 percent.
Ilias also forecasts Malaysia’s main policy rate to hit 3.25 percent by the end of 2018, from the current 3 percent, while Singapore’s is seen to hit 1.55 percent from an estimated 1.2 percent by the end of 2017.
While more experts see the Philippines implementing a rate hike next year, the latest pronouncements from the BSP, however, still point to a neutral policy stance as their favored direction.
“Our monetary policy is independent of what the Fed does. We’re not obliged to follow since we don’t have fixed exchange rate. Instead, our primary focus is on the inflation outlook relative to our target,” Espenilla recently told reporters.
What the governor is hinting at are further refinements in the BSP’s current monetary-policy tool kit to give monetary-policy more teeth.
“We are upgrading our monetary operations framework: The interest-rate corridor [IRC] system was deployed last year to enhance the monetary-policy transmission mechanism. The IRC is also compatible with the further development of our capital market. We shall continue to enhance the IRC for a more market-friendly implementation of monetary policy,” Espenilla said in a recent speaking engagement.
“To maintain price stability, the BSP adopted the Inflation Targeting framework in 2002. This has served us well. We continuously refine monetary-policy conduct. The implementation of the interest-rate corridor system in July 2016 is a manifestation of our commitment. More refinements are coming. These changes are enhancing the transmission channels of monetary policy,” he said in a separate talk.