By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) could raise its policy rate by 50 basis points (bps) in its next tightening move, as analysts at Deutsche Bank (DB) Research warned that inflation expectations have gotten unanchored.
Deutsche Bank Research said the central bank will likely be more aggressive in tightening monetary policy following BSP Governor Eli M. Remolona, Jr.’s latest hint of an off-cycle rate hike.
“We read its announcement for an off-cycle hike as a signal that inflation expectations are unanchoring, which thus calls for more decisive motion to be taken, on condition that April’s 7.2% year-on-year inflation,” Deutsche Bank Research said in a report published on Monday.
This got here after Mr. Remolona’s interview aired on Money Talks with Cathy Yang last Friday where he said the Monetary Board is considering delivering its second straight rate of interest hike before their scheduled June 18 policy meeting.
For Deutsche Bank Research, this might mean that the policy rate shall be raised to five% on or before the Board’s next policy review.
“We expect BSP to now hike by 50 bps at its next meeting, whether off-cycle or its scheduled one on 18 June, because it takes a stronger stance in managing inflation expectations,” it said.
The central bank first hiked by 25 bps in April, after one-and-a-half years of easing, to lift the benchmark borrowing cost to 4.5%.
BSP officials said the newest move got here as a preemptive measure to regulate broader second-order price effects and keep inflation expectations anchored amid growing risks from the Middle East war.
Mr. Remolona has left the door open to further tightening, noting that the central bank seeks to uphold its price stability mandate and produce the headline print back to its 3% goal.
It may possibly be recalled that inflation settled past the BSP’s 2%-4% tolerance band for a second consecutive month after accelerating to 7.2% in April from 4.1% in March.
Deutsche Bank Research likewise expects the BSP to proceed tightening in August, with a projected 25-bp hike to bring the important thing rate of interest to five.25%.
“We also expect BSP to proceed tightening in August by 25 bps (for now), which effectively brings 75 bps more in policy rate increases to five.25% by August, against our initial 50-bp expectation,” it said.
PALACE MEETING
Meanwhile, Malacañang said the government is working closely with the BSP to preserve economic stability and protect consumers from rising prices.
“The economic team and the BSP are working in sync in maintaining macroeconomic stability and safeguarding the purchasing power of Filipinos,” Palace Press Officer Clarissa A. Castro told a news briefing in Filipino on Monday.
Her remarks got here after Mr. Remolona signaled that a gradual peso depreciation could still be manageable amid external pressures, including rising global oil prices, shifts in US rates of interest and market sentiment.
President Ferdinand R. Marcos, Jr. met with BSP officials and the Development Budget Coordination Committee in Malacañang on Monday to debate economic concerns, although the Palace didn’t disclose the agenda.
Ms. Castro said the Executive and the BSP “will do every thing to forestall the depreciation of the peso.”
“We all know what we face; this isn’t just a neighborhood problem. If we aren’t facing global oil prices, there’s the interference of other groups in our government,” she added.
An analyst said Mr. Remolona’s stance on limiting the central bank’s foreign exchange (FX) market intervention to smoothening out sharp inflationary swings slightly than stopping a selected level proves “realistic and transparent” considering its primary mandate.
Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., noted that the BSP chief’s signal of allowing a gradual peso depreciation, even potentially to the P63.50-a-dollar level, aligns with the central bank’s duty to administer FX volatility that would trigger inflation.
“The Philippines runs a versatile exchange rate system, meaning the BSP doesn’t defend a selected level of the peso. Its job is to administer volatility, not dictate prices,” he said in a post on Facebook. “Attempting to fix the currency at an arbitrary level can be costly and ultimately ineffective given global market forces.”
Meanwhile, a trader told BusinessWorld that the central bank can only prevent excessive volatility within the FX market but not counter trends which can be behind the peso’s recent decline.
“(The) BSP maintains presence within the FX market to smooth out volatility or sharp swings and doesn’t goal a selected exchange rate,” the trader said in a Viber message. “Thus, it cannot break or counter a market trend but slightly the central bank goals to limit outsized and excessive day-to-day volatility.”
For the reason that United States and Israel’s initial attack on Iran on Feb. 28, the peso’s movements have been largely driven by global aspects resembling the dollar’s strength, investors’ risk-off sentiment and still elevated oil prices, in line with Mr. Ravelas.
Japan-based MUFG Bank Ltd. earlier noted that the peso, as of May 18, has fallen by 6.6% against the greenback for the reason that war erupted, the worst seen amongst several Asian currencies.
The local unit continued to sink to recent record lows this month as uncertainties surrounding the Middle East war sustained safe-haven demand for the US dollar. It closed at a fresh low of P61.75 versus the greenback on May 18 and 19.
Nonetheless, Mr. Ravelas said it’s more necessary to watch the peso’s spillover effects on consumer prices slightly than the mere exchange rate.
“The important thing query isn’t whether the peso is at P60 or P63, but whether that movement is feeding into higher prices,” he said. “If it does, the BSP will act — through rates or liquidity tools. If it doesn’t, some flexibility is definitely healthy for the economy.”
Meanwhile, Lloyd Chan, a senior currency analyst at MUFG Global Markets Research, noted that the local currency will remain vulnerable to global oil prices and better US yields.
“(Philippine peso) appears particularly vulnerable, given the sharp rise in inflation and a BSP policy rate of just 4.5% that’s insufficient to compensate for the rising risk premium,” he added in a report on Monday.
The BSP chief had noted that a weak peso could also boost the country’s exports, which could help narrow the country’s current account deficit.
For the trader, the BSP will likely keep its intervention minimal to “balance keeping exports competitive while at the identical time ensuring imported inflation is mitigated.”
“In reality, a weaker peso isn’t purely negative,” Mr. Ravelas also said. “It may possibly support exports, boost remittances, and help narrow the country’s external deficit — so it’s at all times a balance.”
“So, from a market standpoint, I’d say the Governor was simply being realistic and transparent,” he added. “Investors actually prefer that sort of clarity.”
Meanwhile, MUFG’s Mr. Chan noted that a peso recovery would require a concrete peace deal between Iran and the US to reopen the Strait of Hormuz, as this might signal that global oil trade could finally renormalize. — with Chloe Mari A. Hufana