Philippine C.Bank Holds Key Rate, but Leaves Door Open for Tightening
Manila. The Philippine central bank held interest rates steady, as expected, but left the door open for possible policy tightening as it noted that inflation expectations had started to rise.
The Bangko Sentral ng Pilipinas (BSP) was joined by three other central banks on Thursday (22/03) – from New Zealand, Taiwan and Indonesia – in keeping their key rates unchanged at scheduled policy meetings, even as the United States Federal Reserve hiked the US rate in a widely expected move overnight.
BSP Governor Nestor Espenilla said the central bank's policy decisions would remain dependent on its outlook for inflation and would not be "in lockstep" with the actions of the Fed.
The Philippine's policy-making Monetary Board kept the overnight borrowing rate steady at 3.0 percent and stuck to its view that inflation would ease well into the 2 percent to 4 percent target range next year.
Espenilla, however, acknowledged "inflation expectations have started to rise and will therefore need to be monitored closely in the coming months."
Using 2012 as base year, the central bank expects inflation to average 3.9 percent in 2018 and 3.0 percent next year.
Based on the 2006 series, the BSP expects inflation of 4.5 percent for 2018 and 3.5 percent for 2019, up slightly from its prior estimates of 4.34 percent and 3.49 percent, respectively.
The economy is strong enough to "absorb some policy tightening if warranted," Espenilla said, in his strongest signal yet that the option to raise the rate was on the table.
Several analysts believe a tighter monetary policy is warranted, citing a need to anchor inflation expectations.
"The BSP is signalling it might do something at the next policy meeting. They seem to be opening the window for a policy action ... I've been expecting a hike," said Jonathan Ravelas, chief market strategist at BDO Unibank in Manila.
Some Call for Tightening
Meanwhile, the Fed hike prompted China to gingerly raise a key short-term interest rate in a symbolic reminder that Beijing was keeping an eye on global market trends even as it cracks down on financial risks at home.
While the Fed's optimism on the economy should bode well for Asian equity markets, investors are likely to be wary of markets such as Korea, Thailand and Taiwan whose main policy rates are now at par with or below dollar interest rates.
Countries such as the Philippines, India and Indonesia, which have the luxury of higher yields, have the added worry of weakening currencies.
The Philippines, in particular, has seen the stock market fall to six-month lows amid worries of a weak peso, a wide trade deficit and BSP's reluctance to raise rates.
The central bank has kept policy settings unchanged since it hiked its key rate by 25 basis points in September 2014. It set the rate at 3.0 percent in June 2016 when it moved to an interest rate corridor framework.
"In our view, price pressures go beyond the impact of tax reforms and tightening is needed," ANZ economists Shashank Mendiratta and Sanjay Mathur said in a note.
Reuters
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