BSP expected to turn hawkish

The Bangko Sentral ng Pilipinas is widely expected to keep its monetary settings unchanged at today’s policy meeting but it may turn hawkish later this year as inflationary pressures build up.

In his latest research note, ING economist Joey Cuyegkeng said the country’s inflation rate could rise closer to 3.5 percent in the second half of 2017. “This could shake inflation expectations and may require some policy tightening by the middle of this year at the earliest or later this year,” Cuyegkeng said.

The economist thus sees the BSP raising rates by 25 basis points this year, in line with its latest outlook on the US Federal Reserve’s interest rate hikes.

ING has reduced expectations of policy rate hike by the BSP from 50 basis points.

While the BSP is unlikely to change its monetary settings at today’s meeting, Cuyegkeng said he would continue to watch for indications over how the central bank would implement the interest rate corridor (IRC) in the second half.

“With low inflation likely to prevail in the near term and government spending being ramped higher, BSP would be focused on the smooth implementation of the IRC,” Cuyekgeng said.

The transition to the IRC interest rate framework requires the holding of weekly term deposit auctions which in turn are intended to help deepen the capital markets and make interest rate-setting more transparent through increased trading in money markets. At the same time, such a system is seen making the BSP less reliant on the reserve requirement as a mopping up tool.

“The BSP implementation is likely to be gradual which would also mean that the term deposit auction amount could be moderate as not to bring about jump in money market rates,” the economist said.

Inflation this year is likely to go higher but stay within the 2-4 percent inflation target range, Cuyegkeng said.

“This year’s inflation path is unlikely to shake market confidence and demand significantly higher bond yields. We expect inflation to trend higher to around 2.5 to 2.7 percent by the end of this year while averaging at 2 percent,” Cuyegkeng said. Consensus inflation forecast for the year is higher at around 2.8 percent.