BSP seen needing two more rate hikes in 2018

THE CENTRAL BANK will need at least two more rate hikes this year to keep local yields competitive and address inflation concerns “nervousness” in the global markets, a Danish international banker said.

Peter Lundgreen, founding chief executive officer at Lundgreen’s Capital, said the Bangko Sentral ng Pilipinas (BSP) runs the risk of remaining behind the curve with further rate hikes from the United States Federal Reserve.

“There’s a lot of argument now that the central bank is still behind the curve. It’s still valid,” Mr. Lundgreen told BusinessWorld in an interview in Manila. “Of course the Philippines runs its own independent monetary policy, although an emerging market is always more dependent on what happens in the US.”

“Just to keep up with the US for the coming rate hikes is another 50 basis points (bp) and BSP is behind already, so there’s actually more than 100bp still to go just to sort of cope with the environment.”

Mr. Lundgreen said the Fed is expected to raise rates by 25bp each in September and December, which will follow two increases of the same magnitude in March and June. The Fed raised rates once in 2015 and 2016, and three times in 2017 en route to a “gradual” rate normalization.

Mr. Lundgreen believes the central bank should have raised rates in 2017 as a preemptive move.

BSP Governor Nestor A. Espenilla, Jr. has acknowledged that policy makers did not see the need to raise rates when 2018 opened, but eventually saw the need to rein in inflation.

The central bank has raised rates by 100bp so far this year, capped by an aggressive 50bp increase on Aug. 9 which was the strongest move in a decade. Mr. Espenilla has said that the bank is keeping the door open for further rate hikes as needed.

Goods prices have been on the rise since the year opened as the first package of the tax reform law took effect. This was later on aggravated by the sharp rise of oil prices in July. This pushed the seven-month inflation tally to 4.5%, well beyond the 2-4% central bank target.

Mr. Lundgreen added that financial stress “has gone up” recently amid domestic and external events. In particular, the exchange rate will bear the brunt of these developments.

The Danish financial advisory firm still sees the peso trading as weak as P55 against the dollar by year’s end.

“There’s no reason to change that view. In the next six months, nervousness will increase,” Mr. Lundgreen said. “The risk for the peso is increasing, but it’s still not alarming.”

A widening trade deficit will largely drive a weaker currency, although additional rate hikes from the BSP could help temper these pressures. However, Mr. Lundgreen said that the Philippines is not likely to suffer from contagion amid the Turkish lira crisis, but acknowledged that this adds to current headwinds faced by emerging markets.

The BSP’s Mr. Espenilla has said that the bank will let the market determine exchange rates, as prescribing a fixed level for the peso could do more harm than good to the economy. —