Economists now see 2nd rate hike

Economists are now talking about a second rate hike in the Philippines as odds of a possible increase on May 10, the first in more than three years, rose on inflationary pressures.

Noelan Arbis, economist of British banking giant HSBC, said in its latest research note titled “Philippine Central Bank Watch: Ready to go” that the time is ripe and the Bangko Sentral ng Pilipinas (BSP) may finally raise benchmark rates by 25 basis points to 3.25 percent on Thursday.

“In our view, consistent and consecutive readings of abovetarget inflation prints should be enough reason for the BSP to tighten monetary policy as an inflation-targeting central bank,” he said.

Economists and analysts have been expecting the BSP’s Monetary Board to raise interest rates to defend its inflation target and to keep inflation expectations anchored. Inflation leapt to a fresh five-year high of 4.5 percent in April from 4.3 percent in March due to rising oil prices and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration

and Inclusion (TRAIN) Law.

This brought average inflation to 4.1 percent in the first four months of the year, exceeding the two to four percent target set by the BSP.

Monetary authorities vow to act decisively if inflation would reflect second-round impacts from recent tax reforms that could lead to even higher inflation expectations.

Arbis said HSBC still believes that one hike is enough for the BSP, at least for now.

“This is based on our assessment that the BSP would only tighten monetary policy to limit the second-round impacts of tax reforms and to curb rising inflation expectations – not to contain an overheating economy, as some suggest,” he added.

Furthermore Airbis explained, the BSP has sent a clear signal that it would prefer to keep rates steady for as long as it’s feasible, which means that any subsequent rate hike is likely to be path dependent on the first one.

“That said, we’re not completely discounting the possibility of a second rate hike,” Arbis said.

ANZ Research said the situation has somewhat changed over the last few days with the BSP suggesting that price pressures are spreading and that it was prepared to take measures to protect price and financial stability.

“It was also of the view that the economy can withstand higher interest rates if needed. This view of the central bank has raised the odds for a rate hike next week,” it said.

ANZ said its base case is that the overnight reverse repurchase policy rate would be maintained at three percent on Thursday.

On the other hand, ING Bank Manila senior economist Joey Cuyegkeng said the BSP may raise interest rates anew in the fourth quarter.

“We expect BSP to hike policy rates by 25 basis at the May 10 meeting. This would also support the peso and help moderate inflation pressures. We expect another rate hike in Q4 while BSP keeps a hawkish tone in between rate hikes,” Cuyegkeng said.

He explained the high inflation environment feeds second-round effects with demands for higher minimum wages and transport fares.

The economists explained firm oil prices and the relative weak local currency also contribute to expectations of high inflation this year.

The BSP’s Monetary Board has maintained an accommodative policy stance over the past three years to support the country’s expanding economy through a low interest rate regime. It last raised benchmark rates by 25 basis points in September 2014.