BSP seen hawkish till first half of next year

DEUTSCHE BANK expects the Bangko Sentral ng Pilipinas (BSP) to raise policy interest rates until the first half of 2019, taking cue from more “hawkish” statements of policy makers in past weeks.

Economist Michael Spencer said the bank expects aggressive policy responses from the Monetary Board as it realizes that inflation will not ease anytime soon, following a fresh five-yearhigh 5.2% in June and expectations of an uptrend in the next few months.

Mr. Spencer pointed out that the BSP’s June 20 policy statement announcing the second straight rate hike in nearly four years hinted a more active approach to temper price spikes, with benchmark interest rates already “too loose.”

“With a newly hawkish central bank, we now expect they will try to close this gap whereas previously we thought they would pursue an easier policy stance,” the German bank said in a report published last week.

“We now expect policy rates to rise 100bps ( basis points) in the second half of this year and another 50bps in the first half of 2019…”

This forecast came before BSP Governor Nestor A. Espenilla, Jr.’s statement on Friday that the central bank is “considering strong follow- through” policy action in its Aug. 9 review, as he acknowledged that demand-side pressures have begun to feed into inflation.

The BSP raised policy rates by another 25bp in its June 20 meeting to demonstrate its commitment to price stability, despite having long conceded to missing their 2-4% target band for inflation this year. That followed a hike of similar magnitude in May.

Deutsche Bank sees full-year inflation averaging 4.9%, well above the central bank’s 4.5% estimate.

Headline inflation is seen to consistently clock in higher than 4% until next year.

“The real policy rate (reverse repo) is currently -1.7%, the lowest since March 2009,” the report read.

“For an economy growing above potential with inflation above target, this is inappropriately loose monetary policy.”

The bank expects the Monetary Board to raise rates by 50bp each in the third and fourth quarters, and by another 25bp in January- March 2019. Rates are currently 75bp lower than where they should be, the bank added.

Market players are already pricing in a rate hike next month, with some observers even saying that the BSP may opt to turn “more aggressive” and raise rates by 50bp in one go.

Deutsche Bank is also less upbeat about growth prospects compared to other market watchers, as it expects overall Philippine growth to slow to 6.3% this year and to 5.7% in 2019, versus a 7-8% target set by the government. —