Despite softening global oil prices, the Bangko Sentral ng Pilipinas (BSP) may remain hawkish through 2019 to curb inflation expectations and stabilize the local currency, an economist from Dutch financial giant ING said.
Nicholas Mapa, ING Philippines economist, said the BSP might hike interest rates by 50 basis points next year, adding that the US Federal Reserve was still expected to continue its “policy normalization” albeit at a less aggressive pace.
The US policy normalization refers to the hike in interest rates to reach the levels seen before the US-epicentered global financial crisis of 2008-2009, after which the US Fed had to loosen monetary policy to address a liquidity crunch.
“Sentiment toward emerging markets has improved substantially in recent weeks. But central banks in Indonesia and the Philippines are likely to remain hawkish to prevent their currencies from depreciating too much next year,” Mapa said in a research note.
Mapa noted that emerging market currencies recovered sharply in November and expected the trio of the Indian rupee (INR), the Indonesian rupiah (IDR) and the Philippine peso (PHP) to continue outperforming over the forecast period.
The economist noted that the BSP had shown readiness “to adjust as necessary to keep inflation expectations well-anchored” even after revising 2019 inflation forecasts to 3.5 percent from 4.3 percent at the last BSP meeting.
Given their hawkish disposition, ING expects both Bank of Indonesia and the BSP to raise by 50 basis points throughout 2019.
Mapa noted that the Philippine peso struggled in 2018 partly due to concerns about widening trade gaps and resultant deep current-account deficits, along with the Indian rupee and the Indonesian rupiah.
“With oil no longer threatening to jump to $100 per barrel, we can expect some reprieve on the external front for both Indonesia and the Philippines, as their oil import bills may no longer swell in 2019,” he said.
He said Indonesia and the Philippines would still see current-account deficits next year but the oil slick could relieve pressure on their local currencies.
For the Philippines, ING now forecasts the peso to settle at 53.50 against the US dollar by end-2018 compared to its earlier forecast of 54:$1. For next year, ING expects the peso to settle at around 54.45 versus its previous forecast of 54.95 against the US dollar.
He noted that these currencies would face only mild depreciation pressure in the coming months.
“Market expectations of a blowup in the current-account deficits of Indonesia and the Philippines have also subsided, which translates to less pressure on their respective currencies,” Mapa said.
Despite the current outlook, Mapa added that risks remained mostly from the geopolitical scene, which could alter sentiment rapidly and dictate the direction of financial flows.
This year, the BSP has jacked up its key interest rates five times for a total of 175-basis points to address inflationary pressures.