BSP seen to follow Fed rate hike

MANILA, Philippines — British banking giant HSBC said the Bangko Sentral ng Pilipinas (BSP) would likely lift benchmark rates after the US Federal Reserve jacked up interest rates.

Noelan Arbis, economist at HSBC, said a more hawkish US Fed adds to the complex environment in which the BSP must navigate after the US central bank last week raised interest rates for the second time this year.

“Despite easing inflationary pressures, the BSP also looks at external developments for policy consideration. We believe the Fed’s more hawkish stance prompts another 25 basis point hike from the BSP as early as its June 20 policy meeting,” he said.

The US Fed is also looking at two more rate hikes this year.

“Amidst an already-strong US dollar environment, we believe the Fed’s more hawkish stance on June 13 places the onus on the BSP and many other emerging market central banksto follow-suit,” Arbis said.

Arbis said the BSP has always factored in external developments to its policy rate decisions, despite domestic factors being the primary consideration.

Last May 10, the BSP’s Monetary Board raised interest rates for the first time in more than three years. It raised benchmark rates by 25 basis points to curb additional inflationary pressures arising from higher oil prices and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Inflation averaged 4.1 percent in the first five months of the year, exceeding the two to four percent target set by the BSP.

The consumer price index (CPI) climbed to a fresh five-year high of 4.6 percent in May from 4.5 percent in April.

“We still expect headline inflation to peak on a yearly basis in the second half but mainly due to base effects and higher oil prices. But we believe this alone isn’t enough reason for additional monetary tightening,” Arbis said.

The economist said one of the key things to watch out for domestically are rising wages as any significant increase would trigger even higher prices that the BSP would have to avoid.

Downward pressures on rice prices emerge after the government approved the importation of up to 805,200 tons.

“Indeed, it would likely bode well for the BSP to strike a more neutral tone following next week’s policy meeting to stem any significant outflows and further weakness to the currency,” Arbis said.

He said the domestic economic conditions would continue to reign supreme in the BSP’s decision-making.

“If economic data continue to point to slowing inflationary momentum and headline CPI is still expected to retreat to the BSP’s two to four percent target by 2019, we don’t expect any additional rate hikes this year,” he said.