Angelo Taningco
Economist, Treasury Group
We expect the BSP’s Monetary Board to initiate a 25bps policy rate hike tomorrow and to signal a hawkish tone on its monetary policy outlook. Such action, we think, is warranted in order to temper the buildup in inflation and inflation expectations. This would also help manage foreign exchange volatility amid the Fed’s hawkish policy rate outlook and risk-off sentiment given concerns over the US-China trade war and emerging markets’ (EMs) currency pressures.
Last week’s FOMC rate hike decision was made with a hawkish tone, supported by a more upbeat US economic outlook. The Fed’s latest projections include a steeper rate hike path, depicting majority of Fed officials’ preference for 2 more rate hikes this year (or a total of 4 this year), 3 next year, and 1 more in 2020.
Risk-off sentiment on EMs was spurred by elevated global oil prices, US dollar strength, and rising US yields. Escalating trade war concerns—triggered by US tariffs on China, which immediately signaled a retaliation; and US trade skirmish with the rest of the world, including G7 countries—have also contributed to global risk aversion. Against this background, EM currencies have depreciated rapidly, leading several EMs (ex. Argentina, India, Indonesia, Turkey) to initiate monetary policy tightening via sharp policy rate hikes.
Philippine headline CPI inflation has already breached the upper end of the government’s target range, averaging 4.1% in Jan-May. Amid TRAIN’s excise taxes, peso weakness, elevated oil prices, food supply disruptions, and base effects, we still project yoy CPI inflation to rise further in the next couple of months. Meanwhile, minimum wage hikes were just approved in the Visayas region, and we think this will add on to demand-pull inflation and future inflation. In fact, we still expect more hikes in minimum wages in other regions as well as increases in transport fares and electricity rates. With these factors, an upward inflation trajectory is imminent.
The aforementioned developments, we believe, would warrant another modest hike in key interest rates. BSP Governor Nestor Espenilla in his speech in Tokyo today said that the central bank is ready to act in terms of adjusting key interest rates in order to achieve the government’s inflation target as well as to avoid excessive volatility in the foreign exchange market. If such rate hike decision occurs tomorrow, this would be the second time for the year that key interest rates have been adjusted. However, we think that persistent pressure for the peso to depreciate on global risk aversion and BOP deficits as well as ongoing inflation buildup may necessitate a third policy rate hike this year, i.e., in Q3.
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