BSP widely expected to keep rates steady

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is seen to leave policy rates unchanged in its meeting this week as inflation picked up in November after five straight months of decline, London-based Capital Economics said.

In a research note over the weekend, the macroeconomy research firm said the uptick in inflation in November and expectations of further acceleration in the coming months would not be alarming for the central bank as the average growth in consumer prices is expected to remain below the mid-point of the two percent to four percent target of the government for the year.

“The central bank decision in the Philippines is likely to leave rates unchanged at its meeting on Thursday,” said Capital Economics.

“Having previously signaled its intention to leave interest rates unchanged for the rest of 2019, we are sticking with our view that the policy rate will be left unchanged at four percent at Thursday meeting,” it said.

Headline inflation accelerated to 1.3 percent in November after five months of deceleration, fuelled by the sharp growth in the prices of alcoholic beverages and tobacco as well as meat and fish prices.

“Inflation is likely to rise sharply over the coming months as the high bases for food and fuel prices drop from annual comparison,” said Capital Economics.

“But we doubt this will worry the BSP—underlying price pressures are likely to stay subdued and headline inflation should begin to level off around the middle of the year,” it said.

National Statistician Dennis Mapa said growth in consumer prices can be expected to pick up slightly in December because of the continued increase in the prices of meat and fish—the effect of the prevalence of African swine fever – as well as the excise tax effects on alcoholic beverages and tobacco.

He noted that initial data for the first week of December already showed increases in the prices of fish.

“But I think the average for the year will be around 2.5 percent. We will have to track the food group. The sense that I’m getting is that it will increase in December but not really high,” said Mapa.

Security Bank chief economist Robert Dan Roces also expects the BSP to keep on hold a policy rate cut.

 Roces said inflation would approximate two percent in December after picking up to a three-month high of 1.3 percent in November from a 43-month low of 0.8 percent in October.

 He sees inflation averaging 2.5 percent this year after shooting up to 5.2 percent last year from 2.9 percent in 2017 due to elevated oil and rice prices as well as a weak peso.

Nicholas Mapa, economist at ING Bank Manila, said inflation would remain in check as long as supply conditions remain favorable, but is unlikely to visit the sub-two percent level for at least the next 12 month

“With base effects from last year’s inflation spike fading quickly, we expect the acceleration in inflation to continue going into 2020 and settle at around three percent throughout the most part of next year,” Mapa said.

Mapa said the Monetary Board chaired by BSP Governor Benjamin Diokno would likely refrain from slashing policy rates further on Dec. 12 given the higher than expected inflation print in November.

“Given his dovish leaning however, Diokno could resume his rate cut cycle as early as 1Q 2020. The peso may recover in the short-term as faster inflation will mean that a BSP rate cut is off the table for now,” Mapa said.

Further ahead, Capital Economics expects the BSP to resume cutting rates next year as economic growth is set to fall short of the government’s target of 6.5 percent to 7.5 percent for next year.

“We expect the central bank to cut rates by 50 basis points in 2020, taking the policy rate to 3.5 percent,” the firm said.

 The BSP slashed benchmark rates by 75 basis points this year due to a benign inflation environment and slower-than-expected gross domestic product (GDP) growth, partially unwinding its tightening cycle that saw rates jump by 175 basis points last year.

 It decided to take a prudent pause last Nov. 14 keeping the reverse repurchase (RRP) rate at bay at four percent to allow previous monetary actions including the lowering of the reserve requirement ratio to work its way to the economy.