Tightening cycle of BSP is over — economists

MANILA, Philippines — Economists are convinced the tightening cycle of the Bangko Sentral ng Pilipinas (BSP) is over as inflation is seen easing back to the central bank’s two to four percent target starting next year.

Sanjay Mathur, chief economist at ANZ Research, said the BSP may keep interest rates steady until 2020 after hiking rates by a total of 175 basis points to rein in inflation.

“We are confident that the tightening cycle in the Philippines has now concluded and no further hikes are likely in 2020,” Mathur said.

Mathur said the Monetary Board kept interest rates unchanged last Thursday as it expects inflation to ease back to the target as early as the first quarter instead of the first half of next year.

The central bank lowered its inflation forecasts to 5.2 percent this year, 3.2 percent next year, and three percent in 2020.

“The recent decline in oil prices and the likely passage of the rice importation bill should help in alleviating price pressures in the economy. These developments also reinforce our view that the rate tightening cycle in the Philippines has now concluded. We do not expect any rate hikes in 2019,” he said.

Inflation averaged 5.2 percent from January to November after easing to a four month low of six percent in November from a near-decade high of 6.7 percent in October.

Mathur said headline inflation already peaked at 6.7 percent and has been easing due to lower oil and food prices as well as the dissipation of the one-time impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Alex Holmes, economist for Asia at Capital Economics, said the BSP is unlikely to raise interest rates next year as inflation is expected to fall back further over the coming months as food and energy price inflation continue to moderate.

“With growth slowing and headwinds building, we think the emphasis will soon turn to support the economy. We now expect the bank to loosen policy around the middle of next year,” Holmes said.

In fact, Capital Economics even expects the BSP to slash interest rates in the first rate-setting meeting of the Monetary Board in February next year.

“With inflation set to drop back sharply over the coming months, we suspect the next move will be a rate cut,” Holmes said.

ING Bank Manila senior economist Nicholas Mapa, for his part, said the BSP could slash interest rates in the second quarter of next year as inflation edge closer to within the target as well as the dovish stance of the US Federal Reserve.

“Meanwhile, should inflation edge closer to within target, growth decelerate until the first half of 2019 and the Fed indeed take on a more dovish stance next year, the BSP may quickly slash its main policy rate as early as the second quarter,” Mapa said.

However, not all are convinced the BSP is done with its tightening episode.

Fitch Solutions Macro Research said the central bank could further raise interest rates by 50 basis points as US trade tensions with China and the EU could reignite risk-off sentiment and result in further capital outflows from the Philippines, especially with further tightening by the US Fed.

“While the lower inflation projections by the BSP suggest a dovish tilt, the central bank emphasized that it will remain ‘vigilant against developments that could affect the outlook for inflation and financial stability’ and is prepared to take further policy action to safeguard its mandate. In our view, the central bank had left the door open for further rate hikes,” Fitch said.