‘More aggressive’ hike likely from BSP

By Melissa Luz T. Lopez, Senior Reporter
THE CENTRAL BANK may respond with a more aggressive rate hike in the coming months to rein in rapid inflation, economists at the First Metro Investment Corp. (FMIC) said, against a backdrop of a “turbulent” but rapidly growing Philippine economy.
Bernardo M. Villegas, economics professor at the University of Asia & the Pacific, said the Bangko Sentral ng Pilipinas (BSP) may even opt to raise rates by 50 basis points (bp) in one go.
“We need more aggressive policy because countries all over the world are raising interest rates and we are behind the curve,” Mr. Villegas said during the FMIC midyear economic briefing yesterday at the Grand Hyatt Manila.
He noted that the next tightening move will definitely occur “within the third quarter,” saying he is convinced that the BSP will “correct their error” in six to eight months’ time.
The Monetary Board tightened rates by 25 bps each during their May and June meetings to rein in future inflation, as prices have steadily risen since January to breach the 2-4% target band. Inflation has averaged 4.3%, pulled up by June’s 5.2% print.
“It’s to minimize inflationary expectations… What’s important for monetary policy action is to prevent these second-round effects. People will think there’s going to be more inflation to come,” added UA&P professor Victor A. Abola.
“The real purpose of monetary policy implementation is to signal, that’s why it’s important to be ahead of the curve.”
Inflation will peak by August and settle lower during the last few months of the year, with the full-year average likely between 4.2-4.5%, the economists said.
FMIC senior vice president Christopher Ma. Carmelo Y. Salazar also noted that bond yields are also “pressured” to keep rising as market players expect two more rate hikes from both the BSP and the US Federal Reserve within 2018.
GROWTH INTACT
Mr. Villegas also pointed out that the Philippine economy is experiencing a lot of turbulence in the face of higher interest rates, rapidly-rising commodity prices, a weaker peso and rising world crude rates. Political noise — by way of continued killings, uncertainties on the vice president poll recount, the ouster of Chief Justice Ma Lourdes P.A. Sereno, and a planned charter change — are likewise “sending conflicting signals to investors.”
Despite these, economists still see a 7-7.5% economic expansion doable for 2018, which if realized would fall within the 7-8% goal set by the Duterte administration.
Growth will be fuelled by strong domestic demand, which will offset weak exports which has maintained a decline over the past few months. Mr. Abola added that manufacturing will remain the leading sector alongside construction, in light with the government’s “Build, Build, Build” infrastructure agenda.
To sustain this momentum, the state needs to keep up the “good work” on the infrastructure front and focus on good governance, said FMIC President Rabboni Francis B. Arjonillo.
For FMIC assistant vice president Cristina S. Ulang, an overhaul of the country’s tax system is a huge legacy for the Duterte administration. However, she added that improving logistics and decongesting ports would help improve the business climate and would also help reduce consumer prices.
FEDERALISM ‘DISASTER’
Plans to amend the 1987 Constitution are also seen as a major threat to the Philippines, Mr. Villegas said.
“I think it will be a disaster,” said Mr. Villegas, who was part of the 1986 Constitutional Commission who drafted the existing charter. It is not necessary and it is counterproductive… The completely arbitrary way they are putting provinces together for federal states doesn’t make any sense at all.”
“A lot of those so-called federal states are not ready — they don’t know how to spend money, and so on. I prefer the Local Government Code which precisely gives leeway to those who are competent to do their own thing. Those not ready should not be given the autonomy,” he added.
Instead of a changing the system of government, Mr. Villegas said Congress should prioritize the removal of “unreasonable” restrictions on foreign investments, as this is expected to boost appetite for local industries.
The Consultative Committee for the shift to a federal government has approved a draft constitution and submitted it to Malacañang last week.
UA&P’s Mr. Abola also rejected plans to cut short and overhaul the tax incentives for businesses and ecozone locators, saying that this would run counter to the Philippines’ pitch to global investors.
The Finance department has proposed a second tax reform package to Congress which cuts the corporate income tax rate gradually to 25% from 30% currently, but will be accompanied by the removal of fiscal perks being enjoyed by companies.