Peso rate to stay at current levels; BSP may turn hawkish

While central bank officials have consistently said that monetary policy stance remains appropriate, the market expects Bangko Sentral ng Pilipinas (BSP) benchmark rates will take an adjustment next year because of a combination of rising inflation and weaker peso.

In a commentary, ING Bank senior economist Joey Cuyegkeng said that the way the peso versus the US dollar is trading these past weeks, the BSP’s chance of turning “hawkish” or to lean towards a tightening of monetary policy by raising rates, has increased particularly since most economists view a higher inflation trend compared to the BSP.

Cuyegkeng has noted that the peso is back to the trading range of R50.85R51.45 and with enough US dollar in the market, last week’s exchange rate closed at R51.39. “We still expect peso to trade within this range in the near term with the view that BSP turns hawkish and eventually does a preemptive move to stabilize inflation expectations,” he said, adding that this view is just a minority.

“BSP (has reiterated) that there is no need to change settings (however) the IMF (International Monetary Fund) last week recommended to BSP… to be ready to tighten as inflation pressures rise.”

The central bank forecasts inflation to hit 3.2 percent average for both 2017 and 2018. Cuyegkeng said the market has a higher expectation of 3.4 percent for this year and 3.5 percent in 2018. “Market also expected BSP to raise policy rates by 50bps in 2018,” he added. ING predicts an inflation rate of 3.5 percent next year but has a similar 3.2 percent estimate as the BSP for 2017. As for the peso, it forecasts R51 this year and R51.40 in 2018.

Commenting further on IMF’s outlook report for Asia, the economist said BSP has been advised to tighten policy settings “if signs of inflation pressure emerge.”

“In our view, these signs include not just inflation reports for October and/or November but also commodity prices in combination with a weaker peso and monetary indicators such as liquidity and loan growth,” said Cuyegkeng.

In September, headline inflation rose 3.4 percent year-on-year from 3.1 percent in August, bringing the year-to-date average to 3.1 percent. Core inflation – this does not include certain volatile food and energy items to effectively measure underlying price pressures – increased to 3.3 percent from three percent.

BSP Governor Nestor A. Espenilla Jr. has said that inflation environment will continue to be manageable and within expectations, affording the BSP the space to maintain a stable monetary policy agenda.

September’s 3.4 percent inflation rate – a five-month high – is within the BSP’s 2.8 percent to 3.6 percent forecast, taking into consideration increased prices of rice, fuel and electricity, as well as the peso’s weakness.

During the BSP’s September 21 Monetary Board policy meeting, it did not revise its previous 2017, 2018 and 2019 inflation forecasts of 3.2 percent. The BSP has not adjusted policy settings since 2014, and after it shifted to the interest rate corridor system last year.