New round of monetary tightening seen

MANILA, Philippines–The Bangko Sentral ng Pilipinas is likely to pursue another round of monetary policy tightening before the end of the year even as inflation has likely peaked for 2014, a joint research by First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) said.

In their joint research publication “The Market Call” issued Wednesay, FMIC and UA&P said they were expecting another policy tightening either in the overnight rates or in the reserve requirements before the end of the year.

If the BSP takes the overnight borrowing rate route, the research note sees the monetary authority raising interest rates by 25 basis points. If it opts to tinker with the reserve requirement, the increase is seen at 100 basis points.

In its policy meeting last Sept. 11, the BSP hiked both the overnight policy and special deposit accounts (SDA) rates by 25 basis points. Its policy-making Monetary Board has two more monetary setting meetings scheduled for this year: Oct. 23 and Dec. 11.

FMIC and UA&P’s expectations of more hawkish actions from the BSP is in line with the expectation of most economists who anticipate price pressures arising from food and infrastructure issues through next year, alongside the expected hike in the key policy rates of the US Federal Reserve by the second half of 2015.

The research note said it appeared that the remaining stumbling blocks for an even stronger rebound in the second half—the relatively high inflation rate and the government underspending—were likely to be addressed.

Government spending was seen on a clear upward trend in the second half, noting that President Aquino has already asked Congress for a supplementary budget that would offset the cutting off of funds from the Disbursement Acceleration Program.

“We think inflation has peaked at 4.9 percent (in August), considering that rice harvests start in September and 500,000 metric tons of new imports begin to arrive in October. Manila Mayor Estrada has lifted the truck ban in the city, which should ease the flow of food items to Metro Manila and other parts of the country. Besides, crude oil prices have broken through their strong support levels both in the US (WTI) and Europe (Brent) and are likely to continue their downward trend until first half of 2015,” the research note stated.

Although the BSP is expected to implement another round of monetary policy tightening before the end of year, it is seen pausing first as “consistently softer inflation figures (4.2 percent by year-end) hit home starting September.”

“Besides, with the previous BSP measures clamping down on liquidity, money supply is likely to slide to a single-digit growth by November,” the research note said.

In the meantime, the research noted that exports were showing signs of life as a consequence of the solid recovery in the US.

“To be sure, its growth trajectory will not have its ups-and-downs but hardly anyone doubts that its current expansion is sustainable. That is why some quarters are calling for raising policy rates there sooner than the original Fed plan for second half of 2015,” it added.

On the foreign exchange market, the FMIC-UA&P research sees the peso having difficulty coping with the strength of the US dollar.