Rates seen steady; hike on the horizon

THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to keep borrowing rates steady during outgoing Governor Amando M. Tetangco, Jr.’s last monetary policy meeting this Thursday, according to a BusinessWorld poll of analysts.

Ten of 11 economists interviewed late last week expect the central bank to stand pat on its policy stance during the Thursday review by its Monetary Board, noting that domestic conditions showed no need for tweaks for now despite higher interest rates in the United States.

“We expect the BSP to maintain [its] policy stance despite of a more hawkish Fed. Inflation is still manageable and the pause is to ensure the recovery is sustained,” Natixis economist Trinh D. Nguyen said in an e- mailed response to queries.

The Federal Reserve raised borrowing rates by 25 basis points last week, the second such wave this year after a similar move in March amid confidence over the trajectory of US economic recovery. Earlier, the Fed raised rates by the same magnitude in December 2015 and 2016 after close to a decade of near-zero levels designed to nurse the US economy back to health after the December 2007-June 2009 “Great Recession.”

Mr. Tetangco has said that the Fed rate hike would likely fuel short-term volatility in financial markets here and abroad, but that an improving US economy would benefit the Philippines and the global economy in the long run.

PRIMARY CONSIDERATION

Mr. Tetangco said last week that the central bank will “not necessarily” have to match the Fed’s moves, saying that domestic conditions are bigger considerations than external developments in setting benchmark borrowing rates.

Inflation eased to 3.1% in May from April’s 3.4% — though it was nearly double May 2016’s 1.6% — bringing the five-month average to 3.1%, well within the central bank’s 2-4% target band. The BSP expects overall price increases to average 3.4% for the full year, with inflation peaking some time next quarter.

Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, said there was “no compelling reason” for the central bank to tweak monetary policy settings this week, adding that any adjustment may be pushed back to November or even to next year.

ANZ economist Eugenia Fabon Victorino, however, expects the BSP to keep a “hawkish” bias in phrasing its policy decision this week, in the face of increasing monthly inflation rates.

But one analyst said a rate hike may be on the table in this week’s meeting.

“With the current trend in inflation rate escalating, the BSP Monetary Board is expected to increase interest rates to bring down [ the] inflation rate to [ a] manageable level which now stands at a shade higher that three percent,” said Emmanuel J. Lopez, chairman of the University of Santo Tomas Department of Economics.

FINAL CALL

The BSP has kept key interest rates unchanged since a hike in September 2014, with its May 11 review marking the 21st straight meeting of policy stability, save for procedural tweaks introduced in June last year for the interest rate corridor.

The Monetary Board’s meeting this Thursday will be the last to be presided by Mr. Tetangco, who ends on July 2 his second and final term as BSP chief and 43 years as a central banker.

He will be succeeded by Deputy Governor Nestor A. Espenilla, Jr., 58, a career official who has served in the central bank for 36 years.

‘MORE PREDICTABLE’

Market watchers describe Mr. Tetangco’s 12-year run as BSP governor generally as one of transparency and predictability.

This, they said, in turn helped the Philippine banking system and the overall economy remain sound and resilient in the face of persistent external financial uncertainty.

“During his term, the moves of the BSP were relatively more predictable, as the BSP became more transparent in communicating its possible policy moves,” said Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines.

Rajiv Biswas, Asia- Pacific chief economist at IHS Markit, also noted that sound regulations helped keep the Philippine banking system growing.

“The sound management of the banking sector and monetary system under BSP Governor Tetangco has created a strong financial climate for the sustained rapid growth of the Philippines’ economy during the past decade,” Mr. Biswas said.

The analysts broadly expect the momentum to be sustained under Mr. Espenilla’s watch. He had earlier assured continuity with enhancements in regulations in the pipeline for his upcoming six-year term.