Bangko Sentral seen keeping rates steady

The Bangko Sentral ng Pilipinas (BSP) is seen to keep its key interest rates unchanged this Thursday—its first monetary policy-setting meeting this year and thus seen crucial in setting the tone for 2018—but investors are bracing for a shift to a hawkish tone as a prelude to a rate increase in March.

“BSP surprised markets with its 3.5-4 percent January inflation forecast,” said ING Philippines economist Joey Cuyegkeng. “We expect a moderate impact of higher excise taxes from the tax reform package in the first month of implementation.”

“With such a high January inflation forecast, the market may become worried that inflation will accelerate faster than expected in the coming months. Second-round effects are still to be determined in March to June. Significant second-round effects could cause inflation to breach the target range of 2-4 percent,” he said.

If the inflation report due today would indeed be in line with the BSP’s forecast, Cuyegkeng said this could raise inflation expectations, which might spur the BSP to tighten as early in the March meeting. ING projected a January inflation rate of 3.4 percent, rising from 3.3 percent in December.

Japanese investment house Nomura also expects the BSP to leave its policy rate unchanged at 3 percent this Thursday but anticipates a “shift to a more decisive, hawkish tone to set the stage for an eventual hike at the next meeting in March.”

Nomura projected that the January inflation rate might have jumped to 3.8 percent, with a similar pick-up in core inflation.

“While headline inflation in January has eased or surprised to the downside across Asia, we believe it will most likely go the other way in the Philippines,” Nomura said in a recent research note.

“Moreover, we expect BSP to recognize the risks that inflation will only drift higher from here as the impact of tax reforms fully play out and, importantly, the output gap—a driver of core inflation—is now more positive,” Nomura said.

Nomura did not rule out the possibility of a 25-basis point BSP rate increase this Thursday, but assigned only a 20-30 percent probability to this, noting that the “BSP may feel the need to be preemptive, as it has been in past hiking cycles.”

In contrast, Nomura said a reserve requirement ratio (RRR) cut would be highly unlikely.

Nomura said this week’s monetary policy meeting of the BSP would thus be very crucial in setting the tone for the monetary policy outlook this year.

Seen adding to the inflationary pressures are key items in the consumer price index (CPI) basket that were affected by the implementation of the tax reforms, including sugary beverages, cigarettes and transport.

“This hawkish tone should set the stage for an eventual hike in March, in line with our baseline forecast, which pencils in a total 100 basis points in rate hikes this year (25 basis points a quarter) starting in March. We note that the starting point is a historically low 3 percent even though growth has been powering ahead for several years now. To put this in perspective, Malaysia’s policy rate was at the same level until last week when the central bank raised it by 25 (basis points) to prevent a buildup in financial imbalance risks from keeping rates too low for too long,” Nomura said.