BSP expected to hold off rate hikes

MANILA, Philippines—American financial group JP Morgan sees the Bangko Sentral ng Pilipinas (BSP) holding off any increase in key interest rates until the fourth quarter of this year, during which it sees a modest rate hike of 25 percentage points.

In February, the country’s year-on-year inflation rate eased to 4.1 percent from 4.2 percent in January. This was also lower than the market consensus of 4.3 percent.  Core inflation also slowed year-on-year to 3 percent from 3.2 percent.

Despite expectations of monetary tightening happening in the first semester of the year, JP Morgan economist Matt Hildebrandt said in a commentary that the BSP was not likely to hike its rates in the near term.  He noted that Philippine inflation was still “comfortably within the BSP’s target range.” The last BSP statement characterized inflation as “manageable” and expectations as “anchored.”

Initially following Typhoon “Haiyan” (locally known as “Yolanda”), the JP Morgan economist said some analysts in the market were forecasting inflation to rise as high as 6 percent in some months.

“However, price pressures turned out to be more subdued than that and the paring back of inflation forecasts should also pare back expectations for the BSP rate action,” he said.

Having said that, Hildebrandt said a quarter-percentage BSP rate hike was possible by the fourth quarter.

“First, the BSP is shifting down its inflation target range to 3 plus or minus 1 percent next year. Second, if inflation rises at about its trend pace each month over the next two years, then over-year-ago inflation will remain at or above 3.5 percent (year-on-year) in most months. This will leave inflation uncomfortably close to the upper end of the BSP’s target range next year and, thus, we expect modest tightening later this year, and/or early next, to help keep expectations in check,” he said.

On the inflation print for February, Hildebrandt said supply-side prices were still driving inflation but noted that sequential price pressures were more subdued in February relative to previous months.

Food prices rose by 0.4 percent month-on-month compared to an average 0.8 percent in the two previous months while housing, water, electricity, gas, and fuel fell 0.2 percent after rising nearly 1 percent on average in the previous three months, Hildebrandt said. He added that transport had also fallen by 0.3 percent which was assumed to be fuel-related.

“Sequential price pressures to moderate but over-year-ago rate to remain high. After three months of strong monthly gains in the CPI (consumer price index) from typhoon and holiday effects, power tariff hikes, and peso depreciation, the February print moderated,” Hildebrandt said.

“We expect more moderate monthly increases in the coming months, which will lead to deceleration in the sequential trend rate starting in March,” he said.