Philippine Central Bank to Stand Pat on Rates, Hike Still on Horizon
Manila. The Philippine central bank is expected to hold interest rates steady at its meeting on Thursday (21/09), but the prospect of global monetary policy tightening could keep the door open for future rate increases.
Policymakers have not touched monetary levers since they raised interest rates by 25 basis points in September 2014 because inflation has remained moderate even as the economy has continued to gallop ahead at one of strongest paces in Asia.
To make policy transmission faster, they moved to an interest rate corridor in June last year and set the main rate at 3.0 percent.
All 13 economists in a Reuters poll said there was no reason for the Bangko Sentral ng Pilipinas (BSP) to adjust interest rates on Thursday, but five believed the central bank would start raising them in the fourth quarter or in 2018.
Inflation averaged 3.1 percent in the eight months to August, within the central bank's 2-4 percent target for this year and next, while growth was above 6 percent in the first half of the year.
But rising expectations for tighter monetary policy from major central banks could sway Philippine policymakers to hike rates to support the peso, which has lost 2.6 percent against the dollar so far this year, making it the worst performing currency in Asia.
"We don't expect the BSP to stay tolerant of further peso weakness, amid the potential negative impact on investment-related import demand," said Gundy Cahyadi, economist at DBS in Singapore.
The Philippines has been importing a lot of infrastructure related goods as the government prepares for a six-year $180 billion program to build new roads, airports, ports and railways.
"With the economy currently operating above potential, core inflation should continue to move higher. Risks to the inflation target should start to emerge more clearly in the first half of next year," Goldman Sachs said in a research note.
Goldman Sachs also flagged potential price pressures from the government's proposed tax reform package, which seeks to raise excise taxes on fuel, slap levies on sugar-sweetened beverages and cut income tax rates among other measures.
The tax reforms, critical to President Rodrigo Duterte's ambitious infrastructure plans, has been approved by the lower house of Congress in May. The bill still needs Senate approval.
"We expect the BSP to begin hiking rates in early 2018, with policy rates likely to be on hold for the rest of this year," the bank.
Reuters
Tags: Keywords: