ING tweaks forecast, sees no rate hike this year

MANILA, Philippines — Dutch financial giant ING Bank now expects the Bangko Sentral ng Pilipinas (BSP) to keep interest rates unchanged this year as inflation is seen easing within the two to four percent target in 2019.

Prakash Sakpal, economist for Asia at ING, said the Philippine central bank is seen defying tightening anew during its rate-setting meeting on March 22.

“Three Asian central banks are due to meet this week, but all thinking and no action means they are most likely to be non-events – though the Philippines central bank could steal the spotlight,” he said.

He explained policymakers, led by BSP Governor Nestor Espenilla Jr., have flagged their intentions of not rushing into tightening to curb inflation even after inflation kicked up to 4.5 percent in February from four percent in January.

“They argue that inflation would return to the target zone within the next 12 months and given the 12 to 18 months of policy lag, any tightening now would be ineffective anyway,” Sakpal added.

The BSP has set a medium-term inflation target of two to four percent between 2018 and 2020. Based on the assessment of the Monetary Board last Feb. 8, inflation is seen breaching the target to average 4.3 percent this year due to the transitory impact of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law before easing to 3.5 percent next year.

The last time the country breached its inflation target of three to five percent was in 2008 when the consumer price index averaged 9.3 percent due to elevated global and food prices.

Sakpal said the Bank of Indonesia and Taiwan’s Central Bank of China are also likely to maintain current policy settings.

On the other hand, ING Bank Manila senior economist Joey Cuyegkeng has revised his forecast to no change from two 25 basis point rate hikes this year.

“Philippines’ central bank is likely to keep its policy rate steady at Thursday’s meeting and through the rest of the year, as inflation trends lower,” he said.

Cuyegkeng said inflation is seen peaking around mid-year before trending lower in late 2018 and returning to the BSP target range of two to four percent by the first half of 2019.

“With these inflation expectations over the policy horizon, and with a monetary policy lag of 12 to 18 months, we find no compelling reason to tighten anytime soon,” the economist said.

According to Cuyegkeng, the risk to this steady policy rate path is a significantly weaker Philippine peso.

“A decline of four to five percent generates not only momentum, but also fears of the exchange rate’s impact on inflation. Constant and significant direct intervention in the currency market could establish a downward trend of the foreign exchange reserves, which may stoke fears of further weakness,” he said.

As such, Cuyegkeng said the BSP could eventually turn to monetary policy and macro-prudential measures to support the currency.