Maybank Kim Eng sees BSP raising rates by 50 bps

Maybank Kim Eng said the Bangko Sentral ng Pilipinas (BSP) may raise interest rates by 50 basis points this year as monetary authorities around the world are now making policy decisions on a discretionary basis rather than rules-based.

Suhaimi Ilias, regional head of economics research at Maybank International Bank Berhad, said the BSP’s Monetary Board may raise interest rates by 25 basis points at the end of the second quarter and by another 25 basis points in the fourth quarter, after keeping its policy stance unchanged despite upside risks on inflation.

“They are signaling that they are not rushing into the decision. I think their decision to some extent has been influenced by the fact that the CPI base has been changed from 2006 to 2012 that pushed the numbers down to within the two to four percent target,” he said.

He said Maybank Kim Eng sees inflation averaging 4.2 percent this year, breaching the two to four percent target set by the BSP, before easing back to the target at 3.9 percent next year.

He added the peso would close the year at 51 to $1 despite hovering around the 52 to $1 and emerging as the weakest currency in the region after shedding close to four percent since the start of the year.

“On a year-end basis, the peso will remain weak, but we don’t expect it to go weaker because of the interest rate hike we are seeing in Q2 and Q4 that will stabilize the peso,” he added.

Ilias said central banks have added an extra monetary policy consideration after the Global Financial Crisis in 2008.

“I think generally central banks around the world are behind the curve, even the US, because central banks have another mandate. They have other factors to consider and that extra monetary policy consideration is kind of affecting the decision,” he said.

Ilias said post global financial crisis central banks make policy on a discretionary basis rather than rule based.

“I think post global financial crisis central banks around the world have an added sort of a mandate. It’s not just about growth

stability, price stability, and financial stability. We know that regional economies have benifitted from this money printing by the central banks,” he said.

He said that money has been going around looking for returns and the risk from destabilizing portfolio capital flows quite is high now with the US starting to signal that they would raise interest rates for the next three years.

He said central banks in the region, including the Bank of Korea and the Bank of Negara, have started adjusting interest rates upward, while the Bank of Indonesia stopped cutting interest rates.

“So I guess in a way the pressure is on for the central banks to look at US interest rates and to manage interest rate differential to make sure that we don’t suffer from destabilizing portfolio capital outflows,” he said.

Foreign portfolio investments also known as hot money or speculative funds usually leave emerging markets such as the Philippines and fly to high yielding markets with the normalization of interest rates by the US Federal Reserve.

For his part, BSP Deputy Governor Diwa Guinigundo said BSP disagrees on claims monetary authorities are giving mixed signals to the market presumably on monetary policy.

“While BSP observes the increasing trend in inflation in the first two months of 2018 that markets believe should already warrant some monetary tightening, we have always been consistent in explaining to the market that monetary policy decisions are determined mainly by our view on the inflation outlook,” he said.

BMI Research, a unit of the Fitch Group, claimed the BSP is giving mixed signals and even rebased the inflation index to prevent inflation from overshooting its official target.

Guinigundo said the claim made by BMI is patently wrong and malicious as the rebasing of inflation usually done every six years is not the decision or responsibility of the BSP, but that of the Philippine Statistics Authority (PSA).

“We can be patient in adjusting the policy rate. Nonetheless, the BSP has been very unequivocal in stressing that we remain data dependent and if there are signs that should warrant a change in monetary policy, we shall not hesitate moving the monetary levers,” he said.