Philippine Central Bank Running Out of Time as It Holds Rate
Philippines Holds Rate With 2018 Inflation Seen Breaching Target
(Bloomberg) -- The Philippine central bank kept its benchmark rate unchanged, as most economists predicted, but it may be running out of time to tighten policy as it forecast a breach of its inflation target this year.
Bangko Sentral ng Pilipinas held the overnight reverse repurchase rate at 3 percent, it said in a statement on Thursday in Manila, as predicted by 12 of 17 economists surveyed by Bloomberg. Five forecast an increase to 3.25 percent.
| Central Bank CPI Forecasts | 2018 | 2019 |
|---|---|---|
| New | 4.3% | 3.5% |
| Dec. | 3.4% | 3.2% |
The Monetary Board’s decision was based on inflation returning to the target range in 2019, the central bank said in the statement. “The BSP is watchful against any signs of second-round effects and inflation becoming broader based,” it said.
Governor Nestor Espenilla, who took office in July, is under greater scrutiny with his credibility at stake. Price pressures are building after a new tax law raised the cost of fuel, sugary drinks and cigarettes, and some economists have warned the central bank may be too slow in raising rates.
An economy growing more than 6 percent annually is at risk of overheating while the currency is weakening.
“The window to keep policy steady is rapidly narrowing,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. “The BSP will likely start its tightening in March. Inflation pressure remain from oil prices and peso weakness and we see risks of a more aggressive tightening down the line if inflation maintains its momentum.”
Other central banks in Asia, such as South Korea and Malaysia, have tightened monetary policy recently to rein in inflation. In the Philippines, consumer prices rose 4 percent in January from a year earlier, up from 3.3 percent in December.
What Our Economists Say...Scope for BSP to delay tightening appears to be running out. Inflation is already at the top of the target range and poised to move significantly higher still. This threatens to unglue inflation expectations.Domestic demand is already firm and set to pickup, increasing the risk of second round effects. Barring a collapse in oil prices or domestic demand, the BSP is likely to raise interest rates by at least 25 bps this year. A rate hike might have happened already today if not for the dip in oil prices and relatively stable response in the peso in the aftermath of recent financial market volatility. -- Tamara Henderson, Bloomberg Economics |
The Philippine peso closed 0.4 percent lower against the dollar before the decision. It has lost more than 2 percent this year, the worst-performing currency among emerging markets after the Argentine peso. The benchmark stock index fell 0.3 percent.
One-month non-deliverable forwards on the peso extended its losses after the rate decision. The contracts dropped 1 percent to 51.78 per dollar as of 5:29 p.m. Manila time. That compares with the closing rate of 51.325 at the spot market based on prices from the Bankers Association of the Philippines.
Still, others are unconvinced that there is an urgency to hike rates.
“I do not think that the BSP will move soon,” said Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines in Manila. “The recent surge in inflation was expected, and I believe that this is a temporary spike.”
Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London, reiterated its view for no change in the key rate in a note after the decision.
--With assistance from Clarissa Batino Cecilia Yap Lilian Karunungan and Chris Bourke
To contact the reporters on this story: Siegfrid Alegado in Manila at aalegado1@bloomberg.net, Ditas Lopez in Manila at dlopez55@bloomberg.net.
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karl Lester M. Yap
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