Investment banks still see BSP raising key rates in H2

Investment banks are divided about the next move of the Bangko Sentral ng Pilipinas (BSP) after it kept interest rates steady in the first half despite a series of rate hikes by the US Federal Reserve.

BMI Research, a unit of Fitch Group, said the BSP is likely to raise interest rates by 50 basis points amid strong capital outflows.

“We maintain our expectations for the BSP to hike rate by 50 basis points before end-2017 to curb inflationary pressures and to stem risks of capital outflows,” it said.

Although the central bank maintained a neutral stance during the last rate-setting meeting chaired by Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr., BMI reiterated the balance of risks is tilted to the upside with regards to inflation which may prompt the central bank to adopt a more hawkish stance over the coming months to manage inflationary pressures.

“Moreover, over the coming months, we expect diverging monetary policy visà-vis the US and fears of fiscal slippage to increase the risk of capital outflows, which the BSP will likely be mindful of,” it said.

DBS Bank Ltd. of Singapore said interest rates could increase by 25 basis points as early as Aug. 10.

“Expect the BSP to raise its policy rate by 25 basis points to 3.25 percent at its meeting on 10 August. If so, this will also be the first policy move under its new governor,” it added.

The Singapore-based investment bank said the central bank would deliver another 25 basis point increase by end-2017 and pause until the middle of 2018.

“Thereafter, risks of more hikes will depend on the success of the government’s infrastructure overhaul in generating demand,” DBS said.

Apart from keeping interest rates unchanged last Tuesday, the BSP slashed its inflation forecast to 3.1 percent from of 3.4 percent and set the assumption at three percent for both 2018 and 2019.

Inflation eased to 3.1 percent in May from 3.4 percent in April and brought the average to 3.1 percent in the first five months, well within the BSP target of two to four percent.

“Considering the more benign inflation outlook, we see a risk of delays to our baseline forecast of 50 basis points in policy rate hikes in the second half,” Nomura Securities Ltd. economist Euben Paracuelles said.

ANZ Bank economist Eugenia Victorino said the bank is reviewing its earlier forecast of a 50 basis point increase in the second half.

“Our current 2017 forecast is for two rate hikes of 25 basis points each commencing in the third quarter. We will be revisiting them to take into account the recent drop in oil prices as well as the softer-than-expected inflation data in May,” Victorino added.

Meanwhile, the peso ended yesterday its nine-day slump, gaining 12.5 centavos as the market continues to price in the hawkish statements of the US Federal Reserve and after the Bangko Sentral ng Pilipinas (BSP) kept interest rates untouched.

The local currency closed at 50.22 to $1 from Thursday’s 50.345 to $1. It opened weaker at 50.38 to $1 but eventually recovered and closed at an intraday high of 50.22 to $1.

Total trade amounted to $557.3 million, lower than the $802.4 million booked last Thursday.

Security Bank Corp. said in its daily market edge report the peso traded within the 50.20 to 50.50 against the dollar.

It pointed out the peso has been depreciating against the greenback for the past nine trading days after the US Federal Reserve raised interest rates for the third time since December.

A trader said the Bangko Sentral ng Pilipinas (BSP) did not intervene in the foreign exchange market.

“The central bank was not seen in the market,” Security Bank said.

Another trader said the peso recovered some ground as the market is slowly pricing in the hawkish statements made by members of the US Fed after it raised interest rates by another 25 basis points this month.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo earlier said the peso breached the 50 to $1 level on account of pronouncements of some Fed officials that even if inflation is still off-target despite the fact that labor market conditions are becoming tighter.