Investment bankers see further rate hike

MANILA, Philippines — Investment banks said the Bangko Sentral ng Pilipinas (BSP) may further raise interest rates as the back-to-back hikes in May and June are not enough to curb inflationary pressures.

In a report, Euben Paracuelles, economist at Nomura Securities, said the central bank may further jack up benchmark rates by another 25 basis points on Aug. 9 as inflation average is seen rising further to 5.1 percent in the third quarter.

“We therefore maintain our forecast that BSP will follow up with another 25-basis point policy rate hike at its next meeting in August, taking the policy rate to 3.75 percent this year,” Paraceulles said.

Nomura expects inflation to rise to 4.6 percent this year before easing to 3.5 percent next year. Inflation averaged 4.1 percent in the first five months, exceeding the two to four percent target set by the BSP.

This was one of the factors that prompted the Monetary Board to jack up interest rates for two consecutive rate-setting meetings. It lifted interest rates by 25 basis points for the first time in more than three years last May 10 to curb inflationary pressures.

This was followed by another 25-basis point hike last Thursday as inflation expectations remained elevated for this year.

Paracuelles said inflation may continue to accelerate due to petitions to raise wages and transport fares, while inflation expectations remain elevated.

“Overall, BSP noted that it is ready to take further policy actions as needed. This suggests BSP has left the door open to more rate hikes,” Paracuelles said.

Likewise, ANZ Research economist Shashank Mendirata said the central bank is likely to further raise interest rates after stating that it stands ready to take further policy actions and is vigilant against excessive peso volatility.

“In our view, the central bank has kept the door open for further rate hikes. Accordingly, we will be revisiting our policy rate forecasts,” Mendirata said.

The economist said ANZ is concerned over rising inflation as it is expected to average 4.7 percent this year, as well as robust credit and import growth

“The economic data continue to portend over-heating pressures in the economy,” Mendirata said.

The country’s trade deficit surged by 59 percent in the first four months, implying further deterioration in the current account. The peso, on the other hand, depreciated by 6.6 percent and could add further to inflationary pressures.

Meanwhile, HSBC economist Noelan Arbis said headline inflation may peak in the second half mainly due to base effects and higher oil prices.

Arbis said there is a need to watch out for second-round impacts from the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law in the form of higher wages.

Meanwhile, he said the passage of a government proposal to end quantitative restrictions on rice imports should put downward pressure on headline prices and help curb inflation expectations.