Central bank watching tax reform, Fed rate hike

SIGNALS of another rate hike in the United States in the next few months and tax reforms now being crafted in Congress are the two key factors Philippine monetary authorities are watching for their policy impact, the central bank chief said yesterday.

In a speech on Tuesday, Federal Reserve Chairman Janet L. Yellen said it would be “unwise” to wait too long before tightening the Fed’s policy stance, with inflation expected to pick up and the job market to improve further.

Ms. Yellen did not specify when the hike will be introduced, although a number of economists say a 25-basis-point ( bps) increase could be on the cards next month.

“The Fed has been consistent in stating that they are poised to raise rates and reduce accommodation. The timing and magnitude, however, are what remain undetermined at this point,” BSP Governor Amando M. Tetangco, Jr. told reporters in a mobile phone message.

The Fed last raised rates by 25 bps at its Dec. 13-14 meeting

and kept it steady in last month’s review. Ms. Yellen had then bared plans to increase rates three times this year.

Ms. Yellen flagged “changes in fiscal or other economic policies” under the newly installed Trump administration that could affect the monetary policy outlook.

Prior to assuming the presidency, Mr. Trump bared plans to introduce tax cuts and increase infrastructure spending in order to stoke economic growth and inflation.

BSP’s Mr. Tetangco said tax reform proposals have a potentially bigger impact on monetary policy here than US policy shifts.

“The Fed chair also flagged the need to discern the impact of the new fiscal policies of the Trump administration,” Mr. Tetangco said.

“The latter is not unlike our concern in the Philippines: we are watching out for the final form of the tax reform that will be approved by Congress,” he added.

“We will have to determine the impact of such changes in fiscal policy on the inflation path going forward, keeping in mind the need to distinguish the shortterm impact versus the longerterm effects.”

Inflation has been on an uptrend since the second half of 2016. Prices of widely-used goods rose by 2.7% in January, the fastest pace in over two years. The central bank currently expects inflation to average 3.5% this year, rising from 2016’s 1.8% but still within the 2-4% target band.

BSP officials have pointed out in recent policy meetings that inflation risks are tilted to the upside, citing proposals to raise taxes on fuel and cars under the first tax reform package the Finance department submitted to Congress in September last year. The proposal aims to tax the rich more and the middle class less, in the end raising more revenues to help finance an infrastructure buildup.

Analysts at DBS Group Research have said that the BSP may consider a 25 bps hike during its March 23 meeting, matching a similar increase that may be introduced by the Fed during its own upcoming March 14-15 policy review. Other economists also expect the BSP to raise the benchmark rate to as high as 3.5% before the year ends from 3.0% currently to keep yields competitive and as inflation has bottomed out. —