Economist: BSP may keep interest rate steady for now

After raising interest rate four times in a row this year, the Philippines’ central bank is expected to take a breather and leave interest rates unchanged when the Monetary Board (MB) holds their regular meeting on Thursday.

ING economist for Asia, Prakash Sakpal, commented over the weekend the central bank’s Monetary Board may opt not to change interest rates this week after a slowing GDP growth and steady October inflation rate.

The MB, the policy making body of the Bangko Sentral ng Pilipinas, had already raised policy rates four times in a row this year for a cumulative 150 basis points (bps).

With that Sakpal described the Philippines to have the region’s “busiest central banks” as it tried to balance growth with an inflation rate that has peaked to a nine-year high of 6.7 percent (in September and October) and in its “drive to rein in currency weakness.”

One of the immediate impact of the last 50 bps rate hike last September 27 was to steam up the peso to become one of Asia’s best performing currency for the month of October, according to Sakpal.

So far, the peso continues to get stronger with an 1.8 percent monthon-month appreciation versus the US dollar. On Friday (November 9), the peso closed at 152.96 from the previous 152.57.

Sakpal said domestic GDP growth for the third quarter of 6.1 percent, which was slower than the second quarter’s 6.2 percent and same time in 2017 of 7.2 percent, will likely convince the BSP to pause on its rate hikes.

“Until the Philippines GDP release, our house view had been for a 25 bps BSP rate hike at the meeting (this) week. That's now been revised to no change, probably through the rest of the year,” he added.

ING Manila-based economist, Nicholas Mapa, said the “disappointing (third quarter) growth print may give some ammunition for the doves to call for a pause at (this week’s) Monetary Board meeting.”

The combined 150 bps rate increase since May has weighed down on consumption, added Mapa, and “will dampen investment going forward.”

“Holding off on an additional rate hike, as marginal as it may be, would give the Philippine economy the breathing room it needs to catch its breath and resume its above six percent growth trajectory in the fourth quarter with the mid-term election in sights,” he noted.

ING expects GDP full-year growth of 6.2 percent which Mapa said, was “well-within reach.” This was a lower projection from its previous 6.3 percent. For next year, they expect 6.3 percent growth with a robust first half on account of election-related spending.

“Going forward, growth is seen to likely follow the same formula of late with slowing consumption offset by government spending and investments,” he said. “Meanwhile, given the burgeoning economy, the trade gap is seen to widen to fuel the pace of expansion, exerting a fundamental pressure on the peso to weaken.” (LCC)