BSP forecast to raise rates in September

The Bangko Sentral ng Pilipinas (BSP) is likely to raise its overnight borrowing rate by another 25 basis points in its monetary setting this September to prevent negative real rates that might fuel a local borrowing binge, an economist from Citigroup said.

In a commentary dated Aug. 5, Citi economist for the Philippines Jun Trinidad said local inflation rate was estimated to peak this third quarter, consistent with decelerating rice inflation amid still benign non-food consumer price index (CPI) pressures. Easing inflation risk in the fourth quarter has been a consistent theme of current and previous extrapolations on CPI data, Trinidad said. Nevertheless, he noted that “peakish” inflation sustained by elevated food price shocks had not deterred policy rate hikes recently.

For the first time since 2011, the BSP’s policy-making Monetary Board increased its overnight borrowing rate by 25 basis points to 3.75 percent in July.

There are three more local monetary meetings scheduled this 2014: Sept. 11, Oct. 23 and Dec. 11.

“While wary of second-round price effects, we sense policymakers were averse to seeing more negative real rates as inflation peaks that could contribute to excessive borrowing,” Trinidad said.

In July, the country’s inflation rate surged to 4.9 percent, overshooting the 4.6-percent consensus forecast.

“While worrisome at first sight, the strong typhoon during the month that affected Metro Manila and key food-producing regions in Luzon elevated CPI food, particularly vegetables,” Trinidad said.

“Following this ‘one-off’ typhoon effect and barring stronger weather shocks, we believe food price corrections are in store except for CPI rice. However, rice inflation may be peakish in July-August as our updated monthly CPI rice extrapolation shows deceleration to 10 percent in the fourth quarter 2014 coinciding with forthcoming rice imports and second-round cropping cycle,” the economist added.

But while expecting waning CPI risk, Citi is convinced that efforts at reducing negative real rates and guiding inflation trajectory within the 2015 inflation target range of 2-4 percent would lead to one more 25-basis point increase in the BSP’s overnight rates this September.

“Rate-tightening cycle would probably peak in line with the inflation cycle,” Trinidad said.

As a result, Trinidad said short-duration bonds were favored “until monetary signals are clear that rate adjustments are over.” Doris C. Dumlao