Market expects rate hike in May — DBS
MARKET participants are pricing in a rate hike from the Bangko Sentral ng Pilipinas (BSP) next month, analysts at DBS Bank said, amid concerns that the uptick in inflation and a wider current account deficit have rendered tightening moves necessary.
“The Philippine markets are positioning for a rate hike at the next monetary policy meeting on May 10,” DBS Group Research said in a market commentary yesterday.
“The 10-year bond yield has also risen above 7% [on Tuesday]. More importantly, the 3-month Philippine interbank reference rate has been moving higher with CPI inflation since the start of the year.”
Yields on 10-year bonds stood at 7.2607% at the secondary market on early Wednesday, higher than the 7.1714% seen the previous day. However, the government was able to raise 10-year Treasury bonds at a lower average yield of 6.213% during Tuesday’s auction.
The BSP’s policy-setting Monetary Board will conduct its third rate-setting meeting on May 10. The board has kept its policy stance unchanged in nearly four years, with benchmark spreads ranging from 2.5-3.5% since procedural cuts were introduced in June 2016 for the interest rate corridor scheme.
The board kept rates steady during the March 22 meeting even as inflation maintained its ascent for a third straight month. Instead, policy makers cited robust domestic economic activity and limited concern over higher inflation as reasons for staying on hold.
Price increases of widely used goods accelerated to 4.3% in March under the 2012 base year, led by a surge in the prices of cigarettes and alcohol as well as rice, according to the Philippine Statistics Authority.
This is the fastest price pickup seen in at least five years which brought the three-month average to 3.8%, close to the high end of the BSP’s 2-4% target.
Market watchers are expecting policy tweaks from the BSP as they expect inflation to “top out around 5- 6% in May-June from the tax reforms,” DBS strategists Philip Wee and Duncan Tan said.
The central bank expects monthly inflation to keep rising and peak between July and September.
The weakening trend of the peso is likewise aggravating the situation, the bank analysts added, pointing out the unit’s 4.3% depreciation so far this year. This follows two straight years of a weaker peso-dollar rate.
“With the country’s current account and fiscal balances both in deficits amidst mildly hawkish Fed hikes, the government may be looking to issue more bonds to retail investors ahead. As for the next central bank meeting on May 10, we see the overnight borrowing rate higher by 25bps to 3.25%,” DBS added.
The Federal Reserve hiked key rates by 25 basis points in March, with new chair Jerome H. Powell hinting at succeeding adjustments later this year.
BSP Deputy Governor Diwa C. Guinigundo said earlier this month that there remains no need to adjust interest rates: “While some market indications point to rising inflation expectations, nothing at this point suggests that the market expects persistent significant surge in consumer prices through 2019 that would warrant a change in the monetary policy stance.”
He added that the BSP does not have to match the Fed’s rate tweaks as they come, as current rates remain supportive of domestic liquidity and financial conditions.
BSP Governor Nestor A. Espenilla, Jr. said separately that the low interest rate environment is proving conducive to growth without triggering runaway inflation, thus leaving no need to adjust so far.
Mr. Espenilla, however, said the BSP stands ready to raise loan rates should price increases turn more broad-based. He added that the Philippine economy is robust enough “to absorb some policy tightening if warranted,” saying that the above-six percent growth remains sustainable.
As of its March 22 meeting, the Monetary Board expects inflation to average 3.9% this year, which would represent a sharp increase from the 2.9% rate tallied in 2017. Using the original 2006 base year, inflation will soar to 4.5% from 3.2% a year earlier.
BSP officials, however, find comfort in estimates showing that inflation will decelerate to a 3% average by 2019 — in line with expectations that the impact of tax reform on prices will be temporary.
Some analysts have called off their forecasts for rate hikes in 2018, citing the “reluctance” of key BSP officials to touch key rates anytime soon. Other observers, however, remain of the view that the central bank is already behind the curve at a time of steadily rising global yields.