ING sees another rate hike by BSP in third quarter

The Bangko Sentral ng Pilipinas is nearing the end of its monetary tightening cycle, but it may decide to raise the reserve requirement for banks by another percentage point during its monetary policy setting meeting next week, according to an economist of  Dutch financial giant ING.

In a briefing Friday, ING chief economist Joey Cuyegkeng also said that the BSP may implement within this third quarter another 25-basis- point hike in the overnight borrowing rate as an “insurance” if inflation rate exceeds the 5 percent cap in the next few months.

“The inflation trajectory has tapered down but it’s still on an uptrend, but I guess there’s more leeway on the part of BSP to continue to hold policy rates steady (in next week’s meeting),” Cuyegkeng said.

“Moving forward, it’s all going to be driven by crude prices and whether the  agriculture sector continues to produce and dampen any pressure on the food side. But in our expectations, we’re going to see that downtrend in inflation,” Cuyegkeng said.

He said inflation in the Philippines—based on the old series that uses 2000 as base—would likely breach 5 percent in the next two to three months.

But he said this may be contained to about 5.2 percent, allowing the inflation rate to average at 4.7 percent this year.

This is still within the central bank’s expected range of 3-5 percent.  Inflation rate is seen to average at 4.6 percent next year.

But if inflation indeed becomes “unstable” in the next few months, Cuyegkeng said the BSP may sanction another 25-basis-point hike in its key policy rates this third quarter, bringing the overnight borrowing rate to 4.75 percent.

“I think we’re at the end-phase of a rate hike,” Cuyegkeng said.

As for foreign exchange, Cuyegkeng sees the peso ending this year at 42.45 against the US dollar or even appreciating further.

Meanwhile, the economist said economic growth in the Philippines was normalizing.

The farm sector was a driving force in the first quarter and will likely continue to perform well until the fourth quarter, when it will have to contend against a high base from a year ago.

“We really need a new source of growth,” he said, adding that the government’s underspending was a drag.  He estimated that the domestic economy would have expanded 1.8 percentage faster in the first quarter if the government had only kept its spending at the same level compared to a year ago.

“For a developing economy like the Philippines, there’s so much room to increase absorptive capacity. We need to invest now to have sustainable high growth in the next few years,” he said.

Having said that, he still sees the Philippines moving to a higher trend growth of 5.2 percent during the six-year term of the Aquino administration compared to 4.7 percent during the last regime.

He estimated that for the second quarter, the domestic economy likely grew by 4.8-4.9 percent.

“The problem is it’s difficult to quantify the impact of Japan (earthquake devastation),” Cuyegkeng said, noting the consequent decline in exports.