One more rate hike likely this year, say economists

Economists see another interest rate increase this year after the Bangko Sentral ng Pilipinas (BSP) finally raised interest rates by 25 basis points last Thursday to address concerns over rising inflation, weakening of the peso as well as strong credit and import growth.

Shashank Mendrita, economist for ASEAN at ANZ Research, said the BSP has kept the door open for further rate hike this year after raising the overnight reverse repurchase rate by 25 basis points to 3.25 percent.

“Accordingly, we expect the BSP to raise rates by another 25 basis points in August,” Mendrita said.

The economist said one rate hike is not sufficient to address concerns over rising inflation, weakening of the peso against the dollar as well as robust credit and import growth.

“We believe that one rate hike will not be sufficient to address these issues,”

Mendrita said.

Prior to Thursday’s rate hike, the BSP last raised interest rates in September 2014 by 25 basis points.

For his part, ING Bank Manila senior economist Joey Cuyegkeng said the market may do another rate hike by the fourth quarter.

“We expect another hike but only in the fourth quarter. The market has expected tightening since late last month which has insulated the peso from the recent weakness of emerging market currencies,” Cuyegkeng said.

At yesterday’s trading at the Bankers Association of the Philippines, the peso closed weaker, shedding 39 centavos as the token 25 basis point rate hike by the Bangko Sentral ng Pilipinas (BSP) was not enough to curb rising inflationary pressures.

The local currency closed at 52.19 to $1 yesterday from Thursday’s 51.8 to $1. It opened weaker at 51.95 and hit an intraday low of 52.21. Volume breached the $1 billion level amid heavy trading reaching $1.12 billion from $807.4 million last Thursday.

Traders said the rate hike should be supportive of the peso but the market is wary if the 25 basis point rate hike is indeed enough to control the runaway inflation.

“The peso could move to a steadier ground against a strong dollar, if the foreign exchange markets start to look for more rate hikes, should there be further upside surprises in inflation readings,” HSBC economist Noelan Arbis said.

Another trader said the market is confused about the signals sent by top monetary authorities.

While BSP Governor Nestor Espenilla Jr. assured the market the central bank stands ready to undertake further policy action as necessary, his deputy, Diwa Guinigundo was singing a different tune.

Guinigundo said the 25 basis point rate hike is enough to help inflation return to the central bank’s two to four percent target or at 3.4 percent in 2019 after breaching this year’s target at 4.6 percent.

Cuyegkeng said further rate hikes are likely if upcoming data and developments indicate inflation remains elevated above the BSP target range of two to four percent for an extended period of time.

Furthermore, Arbis said the secondround impacts of the Tax Reform for Acceleration and Inclusion (TRAIN) Law and rising inflation expectations were enough impetus for the BSP to hike its policy rate.

“Our base case is that the BSP will stick with one rate hike this year, but a persistence of second-round impacts would add to the likelihood of an additional policy tightening,” Arbis said.