MANILA, Philippines - The country’s monetary authorities are likely to adjust policy rates middle of the year to arrest rising inflation, an economist from British bank HSBC said.
“We forecast two rate hikes in second half 2014, taking the main policy rate to four percent from the current rate of 3.5 percent,†HSBC economist Trinh Nguyen said in a research note.
Nguyen said it is still too early for the Bangko Sentral ng Pilipinas (BSP) to adjust rates.
“While the central bank will be more vigilant on inflation and will probably raise rates, it is still too early to discern whether the recent pickup in inflation is due to temporary factors, which will abate, or a result of underlying inflationary pressures. We believe the central bank will hold rates tomorrow and keep a close eye on price,†she said.
“Given that it’s too early to discern between temporary factors, which will abate, and underlying inflationary pressures, the BSP will likely opt to keep rates on hold when it meets on Feb. 6. A rate hike, however, will likely arrive in the coming months,†she added.
The next Monetary Board meeting is on March 27 and the subsequent one on May 8.
The HSBC economist noted that after a long stretch of benign inflation, the Philippines entered 2014 with elevated price pressures. Higher food and household costs pushed up January inflation.
“We expect higher utility prices, a still-lingering negative supply shock from Typhoon Haiyan Super Typhoon Yolanda and a weaker peso to keep headline inflation elevated in 2014,†she noted.
Inflation rose 4.2 percent year-on-year in January, higher than HSBC’s projection of 4.1 percent.
“Things are heating up in the Philippines. While January headline inflation came in largely in line with expectations, it continued to breach the mid-point of the central bank’s three to five percent inflation target. This means that the room to keep rates steady has significantly narrowed,†Nguyen said.
For the meantime, HSBC said there is still room for BSP to keep rates steady.
“There is still space for the central bank to keep rates on hold. Headline inflation, while rising, is much tamer underneath the surface. Most of the pickup was driven by food, which continues to be affected by the negative supply shock from Typhoon Haiyan. We expect food prices to stabilize in the months ahead as the effects wear off. Already, there are signs that the shocks from Typhoon Haiyan are slowly wearing off,†she said.
Nguyen cited that the sharp rise of the housing, water, light and fuel sub-index abated in January, slowing to 0.5 percent month-on-month from 1.3 percent in December and November.
“But prices of household equipment, transportation, and health are still rising. This, coupled with the scheduled utility hike in Q1 2014, will likely keep headline inflation between 4-4.5 percent in Q1 2014,†she said.
Nguyen said monetary authorities would be looking very closely on this month’s inflation as this would be crucial in deciding whether to adjust rates or not.
“The February inflation reading due on March 5 will be an important figure to watch as it will indicate how soon the BSP will move to hike rates,†she said.