BSP likely to defer rate hike to Q4

MANILA, Philippines – The Australia and New Zealand (ANZ) Banking Group now expects the Bangko Sentral ng Pilipinas (BSP) to raise interest rates in the fourth quarter instead of the third quarter this year as inflation remained well anchored.

In their latest research note, ANZ economists Glenn Maguire and Eugenia Fabon Victorino said inflation is expected to remain within the two to four percent target set by BSP for this year and next year.

“Nevertheless, average inflation should remain within the central bank’s target range. Moreover, the delay in US Federal Reserve’s tightening could give the BSP enough room to push back its own policy tightening to the fourth quarter, in our view,” the investment bank said.

ANZ said the delay in the additional rate hikes by the US Federal Reserve gives the BSP’s Monetary Board more room to keep interest rates unchanged amid the effect of El Niño weather condition.

“In our view, the deferral of further US Fed tightening, along with the low inflation environment now gives the central bank enough room to keep its policy settings on hold through Q3. For now, we shift our expectations of BSP policy tightening to the fourth quarter (previously third quarter),” it added.

Philippine inflation rose in line with market expectations to 1.1 percent in March from 0.9 percent in February on the back of a rise in transport costs, even as the prices of food and utilities declined over the month.

ANZ said it would continue to watch the situation surrounding food prices.

“Although the Philippine government has pre-emptively imported rice, upward pressure remains on the prices of domestically sourced agricultural products due to the prolonged effects of El Niño,” the bank added.

It explained it would continue to watch the direction of food inflation.

“There have been reports that the government had to import sugar and onions on the back of the protracted impact of El Niño and consequent low harvests,” ANZ said.

The Asian Development Bank (ADB), has stated that the prolonged effects of the drought are likely to lead to a 1.6 percent year-on-year decline in global rice production in 2016.

Though the government has broadly secured supplies of rice by locking in import contracts, the prices of other domestically sourced agricultural products are likely to remain under upward pressure.

According to ANZ, price of oil is expected to remain soft this year resulting to a benign inflation environment prompting it to slash its inflation forecast to 1.9 percent instead of 2.9 percent this year and to three percent instead of 3.4 percent next year.

“Nevertheless, we expect the persistence of depressed oil prices to likely keep average inflation to 1.9 percent in 2016, before rising to three percent in 2017,” ANZ said.

The BSP is still expected to shift its policy framework into an official interest rate corridor (IRC) in the second quarter.