The UK-based Capital Economics expects the Bangko Sentral ng Pilipinas to raise the policy rate this week following the more than five-year high inflation.
“A further rise in inflation in April and more hawkish comments from policymakers suggest the central bank of the Philippines is likely to raise interest rates at its upcoming meeting on Thursday,” Capital Economics senior Asia economist Gareth Leather said in a May 4 report.
Last Friday, the government reported that inflation rose to 4.5 percent year-on-year last month mainly on the back of a jump in prices of “sin” products such as cigarettes and alcoholic drinks. As such, the headline inflation rate based on 2012 prices averaged 4.1 percent in the first four months, already breaching the government’s target range of 2-4 percent.
“In addition to helping clamp down on inflation, a rate hike should provide some support to the peso, which has been one of the worst performing Asian currencies since the start of the year,” Capital Economics said, as latest data showed that the peso weakened against the dollar by about 3 percent to date.
American banking giant Citi expects the peso to stabilize at the 52.50 to a dollar in the next six to 12 months as good macroeconomic fundamentals are seen providing support against further freefall.
“We’re not overbearish on peso,” said Johanna Chua, managing director at Citi and head of Asia-Pacific economic and market analysts. “Government spending is picking up. There seems to be a lot of traction on growth, so that will help put a floor on how much depreciation we’ll see on the peso,” she said.
As of last Friday, the local currency closed at 51.67 against the greenback.
Citi’s forecast factors in the Bangko Sentral ng Pilipinas’ seemingly greater tolerance for a peso depreciation and preference for keeping interest rates low.
According to Capital Economics, higher rates should also help to cool overheating fears in the property sector. Credit to the real estate sector has recently been growing by around 20 percent year-on-year, it added.
But Capital Economics said that with the recent rise in inflation likely to prove transitory, “we doubt a hike [this] week would mark the start of an aggressive tightening cycle.”
“It will most likely be a one-off. The reason why we doubt it will mark the start of an aggressive hiking cycle is that the jump in inflation since the start of the year has been due to temporary factors. The first is an increase in indirect taxes on high-sugar drinks, tobacco and alcohol at the start of the year. Although the year-on-year rate of inflation will remain elevated throughout 2018, it should drop back at the start of next year,” it said.
Also, the second factor behind the recent rise in inflation is a spike in food prices caused by a number of temporary supply-side factors, most notably a series of typhoons, Capital Economics explained.