The Bangko Sentral ng Pilipinas may be forced to raise key interest rates in the fourth quarter as the global economy continues to recover, exerting upward pressures on the prices of goods and services, according to Moody’s Analytics.
In its latest paper on Southeast Asia, Moody’s Analytics said that the Bangko Sentral ng Pilipinas and other central banks in the region would likely keep their key policy rates until the final quarter of the year, when inflationary pressures become significant.
It expects the BSP to raise its overnight borrowing rate by 25 basis points to 3.75 percent.
Similarly, the research firm said, the central banks of Indonesia, Malaysia and Thailand may increase their own policy rates by a quarter of a percentage point to 6 percent, 3.25 percent and 3 percent, respectively.
“Robust domestic activity and the expected second-half improvement in the global economy are likely to lift inflation and start central bankers on a tightening cycle by the fourth quarter,” Moody’s Analytics said in a paper titled “Asia Spotlight: Central Banks in a Bind.”
And because of the increase in global economic activities, Moody’s Analytics said, inflation in the Philippines may accelerate to an average of 3.4 percent this year from 3.1 percent last year.
The inflation forecast of Moody’s Analytics coincides with that of the Philippine government’s own target range of 3 to 5 percent.
Inflation in Thailand will likely rise from 3 percent to 4 percent, Moody’s added, while that in Malaysia is seen to accelerate from 1.5 percent to 2.6 percent.
Inflation in Indonesia will likely stay at 4.2 percent amid efforts to curb price pressures, the research firm said.
Also, the central banks in the region are expected to retain key interest rates in the first three quarters of the year as they focus more on addressing the impact of rising foreign portfolio investments on exchange rates.
Stimulus measures now being implemented in some advanced economies are causing a buildup in global liquidity, much of which is believed to be channeled to emerging Asian markets like the Philippines in the form of securities investments.
Although foreign portfolio inflows are welcome, excessive amounts tend to create significant appreciation pressures on Southeast Asian currencies. For instance, the peso, which closed at 41.05 to a dollar on the last trading day of 2012, already has appreciated by nearly a percent since the start of the year.
“If [appreciation of Southeast Asian currencies] is sustained, this trend will suppress imported inflation [but] could weigh on regional exporters,” Moody’s Analytics said.
Given the adverse effects of currency appreciation on exports, it said, Southeast Asian central banks are seen to keep key interest steady while inflationary pressures remain benign.
This is because an increase in interest rates, which influences a rise in yields of securities, attracts even more foreign portfolio inflows, thus causing the currency to appreciate further.
Thailand’s central bank decided to keep its key policy rate steady earlier this month.
The BSP did the same thing when its Monetary Board met for the last policy rate-setting meeting in January.
However, the BSP decided to reduce the interest rates on special deposit accounts (SDAs) to a uniform rate of 3 percent.