Banks prepare for higher interest rates

MANILA, Philippines -  Investment banks are anticipating a shift in monetary policy by the Bangko Sentral ng Pilipinas (BSP) with the impending rate hike in the US this month.

DBS Bank Ltd economist Gundy Cahyadi said a rate hike by the US Federal Reserve this month would embolden the BSP to change its monetary policy stance.

“While previous comments from the central bank officials have suggested that the BSP won’t necessarily respond to any rate adjustment in the US, we reckon that a hike by the US Fed in March will embolden the BSP to kick-off its own policy normalization,” Cahyadi said.

The central bank is set to hold its second rate-setting meeting for the year on March 23.

DBS expects inflation kicking up to three percent in February from 2.7 percent in January. This is still within the two to four percent target set by the BSP from 2017 to 2020.

“While the current trend is clearly tilted towards the upside, we are still unlikely to see inflation hitting the ceiling of that target, barring an oil price shock, until 2019. Which means that the central bank is unlikely to panic over inflation risks in the near-term,” Cahyadi said.

The BSP expects the February inflation to settle between 3.1 and 3.9 percent.

“The BSP did highlight, however, that inflationary risks remain tilted towards the upside, particularly given oil price movements. It is also interesting that the central bank seems fairly comfortable with recent peso movements and has, in fact, factored in possible (further) weakening of the currency,” Cahyadi said.

Last Friday, US Fed chair Janet Yellen left little doubt about another round of interest rate hike this month as she singled out the danger of the central bank being too slow in boosting rates.

The US Federal Open Market Committee (FOMC) is set to meet on March 14 and 15. Policy makers in the US have penned a three quarter percentage-point rate increases for 2017.

In its latest Southeast Asia Insight about the Philippines, ANZ Bank economist Eugenia Victorino said the BSP is likely to raise interest rates by 50 basis points this year.

“Based on this outlook for higher inflation, we and local market participants expect the BSP to raise its policy rate corridor by 50 basis points in 2017,” she said.

Victorino said the choice of the new central bank leadership would have a bearing on the degree and pace of tightening.

BSP Governor Amando Tetangco Jr., who is scheduled to step down on July 2 after serving as central bank head for 12 years, has time and again reiterated the country’s monetary policy stance would not move in synch with the US.

“As is our practice, we include new information from Fed signals in our scenario building,” he said in a text message.

He pointed out the BSP looks into the potential impact on financial market since this segment is the most reactive to the US Fed decisions in the near term.

“In other words, it’s not a linear analysis, not a one to one correspondence. This is why we have always said that, while we are mindful of the Fed, we do not necessarily have to move in sync with it,” Tetangco said.

For his part, BSP Deputy Governor Diwa Guinigundo said two or three interest rate hikes have been expected by the market in the last few months.

“Inasmuch as the Philippines retains its monetary space, we should take advantage of such a space to continue monitoring and positioning our monetary policy in the general context of a more challenging global economic and volatile global markets as well as in our own unique circumstance as a small, open economy,” he said.

He added authorities would remain conscious of unfolding economic and financial developments including the uptrend in consumer prices and domestic credit that would affect inflation and growth dynamics as well as the dictates of financial sector health.