BSP to keep rates steady, says HSBC

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) could hold interest rates steady for the rest of the year after delivering back-to-back rate hikes in May and June to curb rising inflationary pressures, British banking giant HSBC said.

Noelan Arbis, economist at HSBC, said the passage of the rice tariffication bill in Congress within the year could ease pressure on prices, giving the BSP’s Monetary Board flexibility  to keep benchmark rates unchanged for the rest of the year.

“HSBC expects further tightening by the BSP only in 2019, due to our expectation for rice tariffication to put downward pressure on prices into year-end 2018,” Arbis said.

The BSP believes the proposed amendments to Republic Act 8178, otherwise known as the Agricultural Tariffication Act of 1996, could reduce inflation this year by 0.4 percentage point if implemented in the third quarter and by 0.2 percentage point if implemented in the fourth quarter.

“Government officials are hoping to pass a rice tariffication bill that will eliminate quantitative restrictions on rice imports, possibly shaving 0.2 percentage point off of headline CPI this year and 0.6 percent next year according to BSP calculations,” Arbis said.

The BSP together with other government agencies including the Department of Finance (DOF) as well as the National Economic and Development Authority (NEDA) have been pushing for the passage of the rice tariffication bill in Congress.

The move is seen as a significant step in reforming the agricultural sector by removing unnecessary government intervention in the rice market.

Once the quantitative restriction is replaced by predictable tariffs, NEDA expects  the private sector to respond more effectively to market signals and the government can focus on regulating to ensure food safety and fair market competition.

Inflation kicked up to a fresh five-year high of 5.2 percent in June from 4.6 percent in May, bringing the average inflation to 4.3 percent in the first half, which is above the two to four percent target set by the BSP.

This despite the back-to-back rate hikes in May and June wherein the benchmark rates were raised by 50 basis points. The BSP lifted raised rates by 5 basis points last May 10, its first in more than three years. This was followed by another 25 basis points hike  last June 20  to curb rising inflation pressures from higher prices of oil and rice as well as the impact of the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

HSBC said the brunt of the upside surprise came from food inflation that soared to 6.1 percent - its fastest level since 2014 due to typhoon Yolanda  - and contributed a hefty 2.4 percent to the headline reading in June.

Manila Electric Co. announced higher electricity prices in July, while global oil prices seem to be holding onto recent gains, which suggest further pass-through to domestic transport prices.