Foreign banks see further rate hikes

MANILA, Philippines - Extreme inflationary pressure from food prices and utilities, bottlenecks in supply, and an impending rate hike in the US will force the Bangko Sentral ng Pilipinas (BSP) to implement another round of rate increases in the next two quarters.

That was the general sentiment of foreign financial institutions after Philippine monetary authorities jacked up interest rates by 25 basis points (bps) last Thursday.

The BSP raised its reverse repurchase (RRP) and special deposit account (SDA) rate by 25 bps to four percent and 2.5 percent, respectively while leaving the reserve requirement rate unchanged at 20 percent.

JPMorgan Chase Bank economist Sin Beng Ong said the risk is that inflation could come close to the upper end of the target range, largely in part to rice prices and possibly utility costs.

The inflation target range is three to five percent, with the upside now at 3.8 percent in 2015.

 “Thus, with inflation risks still tilted to the upside on food and infrastructure issues, the central bank will likely keep its tightening stance intact in the fourth quarter of 2014 and this conditions prompts the JPMorgan forecast for a 25 bps hike in the overnight RRP and SDA rate next quarter,” Ong said.

Australia and New Zealand Banking Group Ltd. (ANZ) economist Eugenia Fabon Victorino said the BSP continues to use dual instruments in its conduct of monetary policy.

Having risen to 3.4 percent in August, core inflation is showing signs of second round effects from supply side pressures, she said.

“Meanwhile, the likelihood of power outages in 2015 is rising. We still expect hikes in the SDA rate to reach three percent at a measured pace by end-2015 given the persistently elevated liquidity growth and our rising inflation forecast,” Victorino said.

The economist noted the BSP’s reluctance in incurring additional SDA- related interest expense, calling the SDA facility as the de facto policy rate in the Philippines with around P1.169 billion outstanding as of August.

broadly unchanged for 16 months at around P297bn in August.

“We estimate the BSP’s weighted average cost of capital (WACC) to increase by 20 bps for every 25 bps hike in the SDA rate. Meanwhile, increasing the policy O/N RRP rate by 25 bps would only increase the WACC by five bps,” Victorino added.

Maybank Kim Eng chief economist Luz Lorenzo said another 25 bps increase was in order in the two remaining meetings of the Monetary Board for the year.

 “We think a 25 bps rise is possible in each of the remaining two meetings for the year or a total 100 bps this year to bring the policy rate to 4.5 percent gainst our previous outlook of four percent, if inflation fails to slow significantly. We believe the economy can continue to grow because of the measured pace of monetary tightening as well as the impact being muted by adequate liquidity,” Lorenzo said.

The Maybank economist said they are sticking to their earlier economic growth rate forecast for this year of 6.7 percent.

“If the more hawkish monetary policy scenario pans out, we think there may be no more need for further tightening next year,” she added.

The BSP’s decision is based on the assessment that the inflation target, particularly for 2015, remains at risk.

Latest baseline forecasts have shifted closer toward the higher end of the target range of 3±1 percent for 2015, indicating elevated inflation pressures.

Moreover, inflation expectations are seen to be settling near the upper end of the inflation target range, particularly for 2015.