Bangko Sentral to 'aggressively' hike key rates – CNN PH poll

enablePagination: false
maxItemsPerPage: 10
maxPaginationLinks: 10

Metro Manila (CNN Philippines, September 21) — The Bangko Sentral ng Pilipinas (BSP) will likely raise interest rates by another 50 basis points (bps) next week, according to a CNN Philippines poll of economists.

Twelve of 14 economists and analysts asked this week expect the BSP's policy-making Monetary Board (MB) to "strongly" tighten its policy stance again on Thursday, September 27, marking the fourth consecutive time to do so this year.

The MB had jacked interest rates up by 50 bps to 4% during its last policy meeting on August 9. This was widely seen as a response to the higher-than-usual 5.7% inflation rate in July.

Inflation has averaged 4.8% in January to August, higher than the forecast of economic managers of 4-4.5% and government's medium-term target of 2-4%.

Analysts said the August inflation of 6.4%, highest in more than nine years, followed by the devastation from typhoon Ompong (international name Mangkhut) on agriculture in most parts of Luzon last week are the primary reasons for another possible strong response by the central bank against soaring inflation.

"The most recent reading from the Philippine Statistics Authority does not account for the projected crop damage from the recent super typhoon Mangkhut," said Nicholas Mapa, senior economist at ING Bank.

"Typhoons create demand-pull inflation due to destroyed vegetables in the Cordillera Autonomous Region," added Ernesto Gonzales, economics professor at the University of the Philippines in Manila.

The strongest typhoon that hit the country this year has caused P14 billion worth of damage to agriculture, according to the National Disaster Risk Reduction and Management Council as of September 17.

August inflation "enough" basis

For some economists, the record August inflation rate is enough for the MB to consider an aggressive rate hike, even before typhoon Ompong.

"Because of high inflation rate and the advent of high interest rate it will most likely be 50 bps," said Emmanuel Lopez, dean of the Letran Graduate School.

"Faster inflation in August adds to case for policy move as well as to anchor inflation expectations," added Jonathan Ravelas, chief marketing strategist of Banco De Oro Unibank.

Higher borrowing rates means higher amount to pay for business, car, housing or personal loans. This should discourage consumers and businesses from borrowing from banks. Lower consumer spending would also mean lower demand for goods and eventually push prices down.

A higher interest rate will also make the peso attractive to investors and boost the currency's value. The peso has recently took a beating at the spot market with the exchange rate touching above P54 to $1.

"A rate hike is highly likely due to above average inflation and the steady depreciation of the peso," said Guian Dumalagan, market economist at Land Bank of the Philippines.

The weaker peso, which fell to a 13-year low recently, may further depreciate to P58 per US dollar by 2019, according to London-based research firm Capital Economics.

For University of Asia and the Pacific economics professors Victor Abola and Bernardo Villegas, meanwhile, the BSP will want to show it is tough on inflation and not to be seen as "behind the curve" this time.

Economists last May said rate tightening was long overdue from the MB before it first hiked policy rates for the first time in four years, when inflation continued to escalate for the fourth straight month on April.

But for Noelan Arbis, economist at HSBC Global Research, the consecutive aggressive 50 bps rate hikes are not enough to temper the rising inflation.

"We believe rate hikes alone are insufficient to fully curb inflation and inflation expectations," Arbis explained.

He added that the inflationary pressures caused by Typhoon Ompong might urge the BSP to even further increase interest rates within the next six months.

One could be an additional 25 bps hike in the first quarter of 2018 as the second tranche of excise tax increases take effect in January.

"These are likely to spur higher inflation expectations, and we expect the BSP to react more proactively if this were to happen," Arbis added.

50 bps "too much"

Emmanuel Leyco, a public finance professor at the Asian Institute of Management, says while he sees the BSP raising key rates by 50 bps, he is hoping it would only go with 25 bps. "A hike in cost of capital could backfire as input costs for basic essentials would likewise go up," he added.

Lawrence Dacuycuy, economics professor at the De La Salle University, meanwhile, said a 25 bps rate hike is still possible as economic growth might be affected by rising interest rates. "If they believe that inflation will moderate in the 4th quarter as forecast, a minimal increase may be considered," he added.

Alvin Ang, director of the Ateneo Center for Economic Research and Development, is also expecting a rate hike but on a moderate 25 bps.

Some, however, said the BSP would likely keep key rates untouched.

"It will aggravate the economic slowdown. This will create a domino effect on the peso financial markets," said Leah Estacio-Tiu, chief economist at Corpecon Research.