BSP likely to keep policy rates steady

The Bangko Sentral ng Pilipinas (BSP) may hold off a rate hike this week but is seen to shift to a more decisive, hawkish tone in preparation for an eventual hike in March, investment bankers said.

Nomura economist Euben Paracuelles said inflation likely kicked up to 3.8 percent last month from 3.3 percent in December.

“Moreover, we expect BSP to recognize the risks that inflation will only drift higher as the impact of tax reforms fully play out and the output gap – a driver of core inflation – is now more positive,” he added.

However, Paracuelles said Nomura is not ruling out the possibility of a 25-basis point hike at the rate-setting meeting of the BSP’s Monetary Board on Thursday.

“We assign a 20 to 30 percent likelihood, as BSP may feel the need to be pre-emptive, as it has been in past hiking cycles. In contrast, we see a reserve requirement ratio cut as highly unlikely,” he said.

Paracuelles said the first rate- setting meeting of the central bank, scheduled on Feb. 8, is crucial in setting the tone for the monetary policy outlook this year.

“Headline inflation data for January will be released on Feb. 5 and will be closely watched to gauge the impact of the tax reforms at the start of the year, combined with the run-up in crude oil prices to the overall inflation outlook,” he said.

Adding to the pressure are key items in the consumer price index basket that were affected by the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law that took effect Jan. 1, Paracuelles added.

Gundy Cahyadi, economist at DBS Bank Ltd, said BSP Governor Nestor Espenilla Jr. is finally preparing the markets for a potential rate hike to contain the potential second-round inflationary impact from the government’s tax reforms.

“We have been calling for higher rates in the Philippines since mid-2017, and we may finally see the central bank moving this week or in March. As far as inflation is concerned, we are also of the view that inflationary pressures are on an upward trend, partly due to higher taxes imposed this year,” he said.

However, he said the main reason for the imminent policy normalization is the fact that the domestic economy is robust and could withstand a gradual adjustment in interest rates.

Both Nomura and DBS see the BSP raising interest rates by 100 basis points this year. The BSP last raised interest rates by 25 basis points in September 2014.

On the other hand, Standard Chartered Bank economist Chidu Narayanan expects the Monetary Board to raise interest rates twice for a combined 50 basis points in the first and third quarters of the year.