BSP to take more aggressive approach in next policy setting

MANILA, Philippines - The Bangko Sentral ng Pilipinas will likely take on a “more aggressive” approach when it revisits policy settings in September after a sharp increase in inflation in July, economists said yesterday.

Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, said the 4.9-percent inflation in July will likely lead to a stronger one in August, with the rate seen accelerating above or equal to five percent.

“These higher-than-expected prints for July and August will be compelling for the monetary authorities which likely lead them to hike policy rates even more aggressively on their Sept. 11 meeting,” Neri.

“Unlike their July 31 meeting, we expect the BSP-MB (Monetary Borad) to hike both the RRP (reverse repurchase or overnight borrowing) and SDA (special deposit account) rates by 25 bps (basis points) to increase the chances of meeting their lower 2015 inflation target of two to four percent,” he said.

The Monetary Board raised the overnight borrowing and overnight lending rates by 25 basis points to 3.75 percent and 5.75 percent, respectively. The preemptive action was done to ensure inflation will remain within target, especially for 2015, when the band narrows to two to four percent from the three to five percent this year.

“Our team is convinced that the BSP will continue to give more importance to meeting its primary objective of price stability over developments in the growth front,” Neri said.

“We doubt whether some analysts and government officials can convince the monetary authorities to take on a less aggressive monetary stance even if we see a softer-than-expected second quarter GDP for the Philippine economy,” he added.

Inflation stood at 4.3 percent in the first seven months of the year, above the midpoint of the three to five percent target range. The acceleration in July was due to soaring food prices and increases in utility rates and transport fares.

Trinh Nguyen, economist at The Hongkong and Shanghai Banking Corporation (HSBC), also expects the BSP to hike key policy and the SDA rates during the September 11 meeting as inflation is forecast to remain elevated in August.

“The sharp rise in food inflation will result in the BSP taking more aggressive action at the upcoming Sept. 11 meeting… We believe the BSP will hike both the policy rate and the SDA rate by 25bp at the September meeting,” Nguyen said.

“The reason why markets were disappointed that the BSP only raised reverse repurchase at the last meeting is its limited ability to mop up excess liquidity. Therefore, to seriously temper inflationary pressures and mop up excess liquidity, the BSP will have to hike the SDA rate,” she said.

Nguyen said that the BSP is expected to sail through “rough waters” in the third quarter as the country experiences another typhoon season, which pose an upside risk to food prices due to supply shocks following destroyed crops and agricultural facilities.

“The still lingering supply-shocks from Typhoon Haiyan (Yolanda) further exacerbate third quarter seasonal blues… What’s most worrying is that even with a favorable base effect in fourth quarter 2014, the BSP’s narrower 2015 inflation target of two to four percent will likely be breached,” Nguyen said.

Rahul Bajoria, regional economist at Barclays, expects the BSP to deliver another 25 basis points hike in key policy rates before year-end.

“The BSP has begun its tightening cycle as it seems concerned about inflation expectations, which it believes have been rising. We think the impact of the recent rate hike is likely to be felt in 2015, when the BSP’s inflation target range is lowered to two to four percent, and it will need to keep inflation in check while supporting growth,” Bajoria said.