HSBC: One rate adjustment enough for BSP

The Bangko Sentral ng Pilipinas (BSP) may lift key interest rates only once this year—most likely by 25 basis points in its next policy rate-setting this March—amid muted inflation forecasts, according to a top economist of British banking giant HSBC.

Hong Kong-based Frederic Neumann, managing director and cohead of Asian economic research at HSBC, said in a press chat on Friday that despite heightened jitters in the past few weeks, inflation rate in the Philippines could average at 3.7 percent this year or lower than the BSP’s adjusted forecast of 4.3 percent.

“One rate hike will be enough for the BSP this year because we don’t see as much inflation,” Neumann said.

“Our view is that the BSP is sort of taking a more patient approach, doesn’t want to over-hassle things [noting that] some of the inflation pressures are transitory. But it seems to us that March will be more of a likely timing for a rate hike, partly to control inflation expectations and partly to express the BSP’s view that inflation will be contained,” he said.

Previously, HSBC’s call was for the inflation-targeting BSP to hike interest rates by the second quarter.

After many years of the inflation rate averaging at the low end of the BSP’s 2-4 percent target range, the central bank is bracing for a faster pace of consumer price increases this year especially with the new tax reform program in place.

It was reported this week that the country’s year-on-year January inflation rate shot up to a three-year high of 4 percent, overshooting market forecasts of 3.5 percent. However, the BSP kept interest rates steady, while raising inflation rate forecasts, during its monetary setting on Thursday.

The BSP jacked up its inflation rate forecast this year to 4.3 percent from 3.4 percent while for 2019, the inflation forecast was also raised to 3.5 percent from 3.2 percent.

“We don’t see as big an inflation risk. Also, we take the view that global inflation pressures are still fairly muted.” Neumann said.

HSBC even expects the peso to appreciate to P50:$1 by yearend and oil prices to remain at a manageable level of around $60 per barrel, thereby reducing inflationary pressures.

Neumann said Philippine inflation may breach 4 percent for a month or two but ease afterwards, resulting in a lower average for the year.

March will be more of a likely timing for a rate hike partly to control inflation expectations as well and partly to express the BSP’s view that inflation will be contained, he said.

Furthermore, Neumann is not worried about second-round inflationary effects.

“Some of the tax increases are already reflected in the jump in the CPI (consumer price index). In some sense, you can argue that firms – rather than waiting to implement these price hikes – had it done very quickly, and we think then that second round effects will fade out,” Neumann said, citing a similar experience in other countries that had sanctioned tax rate increases.

“One thing to keep in mind is tax increases also reduce the purchasing power of households, so it’s actually hard then to push ahead with another few round of price increases after that. Usually a tax increase slows consumer spending at the margins, so it cools the price pressures.”

But Neumann said it’s a risk if food and energy prices would shoot up, for instance, if global oil prices would return to the $70-$80 price per barrel. This, however, isn’t the house view of HSBC, which sees massive shale oil production in the US capping increases in global oil prices. —DORIS DUMLAO-ABADILLA