The Bangko Sentral ng Pilipinas is not yet done with its cycle of interest rate tightening alongside the regional trend of “resilient” growth and “persistent” inflation, according to investment bank BofA Merrill Lynch.
In a commentary titled “Asia’s Rate Hike cycle: Not Dead Yet” dated August 26, the investment banking unit of Bank of America projected that the BSP would raise its key overnight borrowing rate twice more for a total of 50 basis points this year from the current 4.5 percent.
“Our previous work has shown that the Philippines is surprisingly resilient to slowdowns in US growth. Also, inflation is relatively high: we expect it to peak close to 6 percent year on year in September or October. Thus, our call on interest rates is relatively hawkish in the regional context,” BofA Merrill Lynch said.
There are only three remaining monetary policy meetings scheduled by the inflation-targeting BSP for this year—September 8, October 20 and December 1. Earlier, Merrill Lynch was projecting only one more interest rate hike by the BSP for the rest of 2011.
The latest research noted that a sharper slowdown in domestic or global growth would affect its projection of further monetary tightening.
It noted that in recent months, in response to signs that the economy was slowing, the BSP opted for a less severe form of tightening and raised the commercial bank reserve requirement by one percentage point in June and another percentage point in July.
“Should the BSP see domestic inflation or economic growth slowing, they may opt for this less-potent form of tightening, rather than an outright hike in policy rates,” BofA Merrill Lynch said.
“They may also hold back on policy rate hikes if the US goes into recession, as the Philippine economy may be affected in the form of slower exports and remittances from overseas workers,” it said.
The investment bank noted that financial markets have refocused on the US downside risk in recent weeks. It now sees a 40-percent chance that the US economy would slip back into recession, higher than the 35 percent probability assigned earlier this month. It also sees the US Federal Reserve undertaking a third phase of quantitative easing or releasing liquidity through bond buybacks.
Due to risks from the US, BofA Merrill Lynch had downgraded its economic growth outlook for many Asian countries, noting that the region was resilient but not immune to US woes. In the case of the Philippines, its economic growth outlook for this year was cut to 4.7 percent from 5.8 percent. For next year, the gross domestic product growth outlook was also downgraded to 5.5 percent from 5.9 percent.
Across the region, BofA Merrill Lynch has slashed its interest rate forecasts and expects most central banks in Asia to remain on pause until 2012.
“However, we do not think the hiking cycle is done. In our view, growth will prove resilient, inflation will prove persistent, and policy interest rates still stand below neutral levels. A US recession would necessitate further cuts in our interest rate forecasts. But, even then, we think fiscal policy, rather than monetary policy, would be the primary macro-defense against a downturn,” it said.