BSP rate hikes likely to continue until 2019

MANILA, Philippines — The series of interest rate hikes by the Bangko Sentral ng Pilipinas (BSP) to curb rising inflationary pressures is expected to continue until next year, global banks said over the weekend.

The research arm of Fitch Ratings said tightening of monetary conditions in the country would continue with three more rate hikes next year amid the normalization path being undertaken by the US Federal Reserve, the weak peso, as well as the full-blown trade war between the US and China.

Fitch Solutions said rising inflationary pressures would prompt the BSP’s Monetary Board to raise benchmark rates by another 25 basis points before the end of the year.

The BSP sees July inflation ranging from 5.1 to 5.8 percent from a five-year high of 5.2 percent in June due to higher power and water rates, oil price and fare hikes, higher excise tax on tobacco products, and rising food prices particularly rice.

The consumer price index averaged 4.3 percent in the first half of the year exceeding the BSP’s two to four percent target.

The central bank raised interest rates by 50 basis points through back-to-back rate hikes to curb rising inflationary pressures. It lifted interest rates by 25 basis points for the first time in more than three years last May 10 followed by another 25 basis points last June 20.

While part of the inflation was caused by the tax reform program that pushed up the prices of basic goods and fuel through the imposition of excise taxes, Fitch Solutions said other key contributing factors also include the rising global oil price and higher aggregate demand.

Energy prices have been on an upswing, average Brent crude price is expected to jump 36.8 percent to $75 per barrel this year from $54.8 per barrel last year.

It pointed out the upward price pressure is also due to high credit growth as a result of the BSP’s accommodative monetary policy stance, with household consumption loans picking up by 16.6 percent in end May.

Furthermore, it said inflation would accelerate to four percent this year and to 4.3 percent next year from 3.2 percent in 2017 as the government’s aggressive infrastructure spending plans gain further momentum, and amid a slowdown in investments leading to a wider fiscal deficit.

“As inflationary pressures mount, we expect the BSP to hike its benchmark overnight repurchase rate by a further 25 basis points to 3.75 percent before end-2018 and have three more hikes in 2019,” Fitch Solutions said.

The research unit of the debt watcher said the series of rate increases until next year would not be enough to dampen aggregate demand as it expects an uptake in consumer credit and robust consumer spending.

It added Philippine consumers would continue to outperform this year and next year due to the ongoing boom in the services sector translating to a gross domestic product (GDP) growth of 6.5 percent this year.

Meanwhile, British banking giant HSBC sees inflation exceeding the central bank’s two to four percent target until the first quarter of 2019.

HSBC said inflation would stay above five percent in the second half bringing the average to 4.7 percent for 2018 and remain above the BSP’s two to four percent target at least into the first quarter of 2019.

HSBC expects the BSP’s Monetary Board to raise interest rates by another 50 basis points on Thursday given the inflation shock that we witnessed in June.

It added inflation would likely peak higher and remain above target for longer than initially expected given the “June shock” that required an aggressive response from the BSP.

HSBC said another inflation shock could not be completely ruled out as the recent inflation figures further heighten inflation expectations and may lead to another round of broad-based price increases.