MANILA – Top economic think tanks are divided on the policy decisions of the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board in 2019 following its decision to keep key rates steady this week.
In a research note, Fitch Solutions maintained its forecast for a 50 basis points increase in the central bank’s policy rates on expectations that inflation will remain above the BSP’s two to four percent target band until 2020.
“Inflation expectations have subsided on the back of the decline in oil prices and peso strength in October-November, but we expect price pressures to remain above the central bank’s target of 3 ± 1.0 percent,” it said.
On Dec.13, the Board gave weight to projections of a lower inflation path over the policy horizon, due in part to several measures put in place to address supply constraints on rice, among others.
This also led to the Board’s decision to slash its inflation forecasts for 2018 to 2020.
For 2018, the inflation forecast now stands at 5.2 percent from 5.3 percent during the rate-setting meet of the Board last Nov. 15.
The latest 2019 forecast is 3.18 percent, down from 3.5 percent and the 2020 at 3.04 percent from 3.3 percent.
The inflation rate last November decelerated to 6 percent from the peak of 6.7 percent last September-October, due in part to drop in global oil prices.
Despite these developments, the Fitch Solutions report said elevated inflationary pressures are still foreseen since core inflation remains on the rise. Also, the lingering trade issues between the United States and China as well as the European Union is seen to further exacerbate price pressures.
Thus, the expectations of further increases in the BSP’s key rates.
This issue, it said, “could reignite risk-off sentiment and result in further capital outflows from the Philippines, especially with further tightening by the US Federal Reserve.”
“Although the primary objective of the BSP is price stability, we believe that further rate hikes will be necessary to address the negative real interest differential against the US, in order to reduce downside pressure on the peso,” it said.
It stressed that continuous depreciation of the local currency “would not only affect financial stability but also put upside pressure on imported inflation.”
“While the lower inflation projections by the BSP suggest a dovish tilt, the central bank emphasized that it will remain ‘vigilant against developments that could affect the outlook for inflation and financial stability’ and ‘is prepared to take further policy action’ to safeguard its mandate. In our view, the central bank had left the door open for further rate hikes,” it added.
On the other hand, ANZ Research forecasts the Board to keep rates steady for the whole of 2019, citing the tone of the central bank’s statement that risks to the 2019 inflation forecast are now balanced.
“We concur with this view. The recent decline in oil prices and the likely passage of the rice importation bill should help in alleviate price pressures in the economy,” it said, thus, the forecast that “rate tightening cycle in the Philippines has not concluded.”
“We do not expect any rate hikes in 2019,” it said, adding that the steady policy rates may likely be until 2020.
Relatively, ING Bank Manila senior economist Nicholas Mapa said the cut in the central bank’s inflation forecast until 2020 “increase(s) the likelihood that the BSP may be done with its recent tightening cycle with the next series of moves probably in the realm of monetary easing.”
“The BSP will likely slash reserve requirement ratios (RRR) as early as 1Q with inflation decelerating while domestic liquidity conditions remains tight (latest M3 growth at 8.2%),” he said.
“Meanwhile, should inflation edge closer to within target, growth decelerate until the 1H 2019 and the Fed indeed take on a more dovish stance next year, the BSP may quickly slash its main policy rate as early as Q2,” he added. (With PNA/PN)
