Economists expect one more rate hike this year

By Melissa Luz T. Lopez, Senior Reporter
ECONOMISTS expect one more rate hike from the Bangko Sentral ng Pilipinas (BSP) this year amid signs that inflation will remain on the rise in the coming months, following a tightening move introduced on Thursday.
Analyses issued by global banks following the central bank’s rate hike signalled that they still see at least one more tightening move within 2018.
“Further hikes are likely if upcoming data and developments indicate inflation remains elevated above the target range for an extended period of time,” ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said in a report issued late Thursday.
The BSP’s Monetary Board raised policy settings by 25 basis points (bp) during their third review for the year, with key rates now ranging from 2.75-3.75%.
BSP Governor Nestor A. Espenilla, Jr. said policy makers saw it was the right time to adjust rates as they now project inflation trending even higher and “more broad-based” than initially expected. The move is seen to arrest second-round effects of tax reform and temper inflation expectations among market players.
Prices of widely-used goods hit a fresh peak in April at 4.5% under the 2012 base year. This pushed the year-to-date tally to 4.1%, shooting above the BSP’s 2-4% target range for 2018.
Prior to this adjustment, the BSP last hiked policy rates in September 2014 when inflation was also trending above their 3-5% target then.
The central bank now sees 2018 inflation averaging 4.6%, versus the 3.9% forecast given last March under 2012 prices and will surely log beyond the 2-4% target. Price increases are expected to ease next year to average 3.4% versus the previous 3% estimate.
“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,” ING’s Mr. Cuyegkeng said, while noting that the peso would likely remain volatile and weak versus the dollar.
Mr. Espenilla said the BSP is ready “to undertake further policy action as necessary” to keep prices stable. For his part, BSP Deputy Governor Diwa C. Guinigundo has said the 25bp increase in rates is “sufficient” to bring inflation back to target by next year.
ANZ Research economists Shashank Mendiratta and Sanjay Mathur said the BSP “kept the door open” for further tightening moves this year, with the earliest tweak expected by Aug. 9, or two meetings from now.
“We believe that one rate hike will not be sufficient to address these issues. Accordingly, we now expect one more hike of 25bps in August,” ANZ analysts said.
On the flipside, HSBC sees policy makers keeping rates steady, but pointed out that future rate increases will depend on emerging price dynamics.
“Our view that the BSP is likely to refrain from a tightening cycle is also based on our assessment that the country is not overheating, as some would suggest,” the global lender said.
“As such, we believe that any additional rate hikes would only be to limit the second-round impacts of tax reforms and to curb rising inflation expectations.”
Nomura sees two more rate increases by June and August, while IHS Markit is pencilling in at least one more hike in the coming months.