How long can the Bangko Sentral defer a rate hike?

MANILA, Philippines — Will the Bangko Sentral ng Pilipinas hike policy rates anytime soon?

Some market watchers don’t think so.

As anticipated, the BSP on March 22, left key rates unchanged, dashing expectations from a growing number of economists who call for a monetary policy tightening to tame building price pressures.

At their second rate-setting meeting for 2018, members of the BSP’s Monetary Board kept the overnight reverse repurchase rate at record-low 3.0 percent.

Corresponding rates on overnight lending and deposit facilities were also untouched.

READ: Bangko Sentral holds policy rates, adjusts inflation forecast

“This hold position tells me that they are not inclined to raise this year,” Union Bank of the Philippines chief economist Ruben Carlo Asuncion said, adding that the BSP has always been “dovish.”

“They think that the economy can take the pressure because their forecasts are based on historical information that inflationary pressures will last from anywhere between 12-18 months,” Asuncion said. “These pressures are from structural fiscal changes like tax reforms.”

The central bank had repeatedly sought to temper calls for adjustments in benchmark interest rate, saying rising consumer prices stoked by a new tax law that slapped higher excise levies on fuel and cigarettes, among others, is only “temporary.”

Using the rebased index, the BSP now projects inflation to average 3.9 percent this year and moderate to 3 percent in 2019, within the government’s 2-4 percent target band.

But Governor Nestor Espenilla, Jr. has acknowledged that inflation expectations “have started to rise and will therefore need to be monitored closely in the coming months.”

The BSP chief likewise said the economy is sturdy enough to “absorb some policy tightening if warranted”—a clear signal that the central bank’s door is open for lifting rates.

Cautious

The BSP’s reluctance to tweak policy rates came even after the Federal Reserve raised its key interest rate on March 22 and hinted at two more hikes this year in a vote of confidence in the U.S. economy’s resilience.

U.S. Federal Reserve Chairman Jerome Powell speaks during a news conference March 21, 2018 in Washington, DC. The Fed announced as expected a quarter-point increase in interest rates under its new chairman. Alex Wong/Getty Images/AFP 

But Espenilla said the central bank doesn’t need to follow tightening moves made by the Fed, as he stressed that the Philippines is charting an “independent” monetary policy anchored to domestic considerations.

“The tone of the last policy meeting, while a touch more cautious, still suggests that policymakers see limited risks to their medium-term inflation forecasts, which implies some downside risks to our forecast,” said Luis Limlingan, managing director of Manila-based brokerage firm Regina Capital Development Corp.

“While we maintain our view that the BSP will hike rates in the second quarter, we now see chances as being lower than before,” Limlingan added.

Headline inflation, as calculated on 2012 base-year, accelerated to a three-year high last February while the Philippine peso, which has been the worst performing currency in Asia so far, continues to slump against the dollar.

Meanwhile, some analysts say the economy may be at risk of overheating as it expands above six percent, among the world’s fastest.

For University of Asia and the Pacific senior economist Cid Terosa, the BSP can only afford to defer a rate hike “after three to four consecutive months of strong inflationary pressure.”

We are not behind the curve

However, the BSP was not convinced that the economy needs “further monetary stimulus” at this moment.

“We need to convey to the market that if it is warranted, the monetary board is prepared to tighten monetary policy,” BSP Deputy Governor Diwa Guinigundo said.

“I think this is to address the continuing fear and nervousness among market analysts that it looks like the BSP is behind the curve. We are not behind the curve,” he added.

The BSP will hold its third rate-setting meeting for this year on May 10.

Policy setting has been steady since the BSP lifted rates by 25 basis points in September 2014.

The BSP Monetary Board can keep rates steady as long as their estimates show that overall price spikes won’t “deviate” from the government’s ceiling for 2018, said Emilio Neri Jr., lead economist at the Bank of the Philippine Islands.

“Major tax reforms do not happen very often and should allow for some flexibility in the inflation target. It is not a rigid target, after all,” Neri explained.

“The recent statement was clearly less dovish than the previous one last February. Market feels more reassured that BSP will be vigilant in ensuring that inflation is well anchored and fall within target by 2019,” he added.