The central bank is likely to start raising its policy rates when the Monetary Board meets on July 31, despite a recent easing in inflation, to curb remaining upward price pressures and sustained growth in domestic liquidity, private economists said.
Besides seeing supply constraints pushing up food prices, the economists cited excess liquidity in the financial markets and accelerating credit growth as bases for their forecasts.
Rising food prices
Jeff Ng, economist at Standard Chartered Bank, said the Bangko Sentral ng Pilipinas (BSP) will have to address inflationary pressures coming from rising food prices by introducing some new measures to curb the risks, despite the slowdown in June inflation to 4.4 percent.
“We see two rounds of policy rate hikes, one more round of SDA [special deposit account]rate hike and a further 1 percentage point increase in the reserve requirement ratio by the end of the year,” Ng said.
Trinh Nguyen, Asian economist at HSBC, also believes the BSP will raise its rates further to keep a lid on inflationary pressures.
High liquidity, credit growth
Nguyen sees excess liquidity, besides inflationary pressures, as another headache for monetary managers, as reflected by the still high 28.1 percent year-on-year growth in M3 money supply in May from 32.1 percent in April.
What is more worrying, she said, is the acceleration of credit growth, which rose 19.6 percent in May from 19.4 percent in April, further stoking inflationary pressures.
“The central bank will be lowering both the lower and upper ends of its inflation target in 2015, to a range of 2 percent to 4 percent (from 3 percent to 5 percent in 2014). We see this target being breached unless the BSP tightens its monetary policy further to mop up liquidity and dampen demand,” Nguyen said.
Reverse repo rate hike
The HSBC economist sees the BSP increasing its main policy rate, the reverse repurchase (RRP) agreement, by 25 basis points, pushing the rate up to 3.75 percent from 3.50 percent at the July 31 meeting.
Taking a similar view, economist Emilio Neri Jr. Bank of the Philippine Islands (BPI) said the surprise deceleration in the inflation print in June may lead the BSP to pause from hiking its SDA rates in the July 31 policy meeting but may still subsequently adjust its reverse repurchase policy rate to signal that it has begun a tightening cycle.
Neri said the BSP may shelve any adjustments to the reserve requirement ratio (RRR) for banks and wait for the recent SDA hike to feed into the system, “more so that M3 growth for the month of May has already decelerated to sub-30 percent and while momentum toward a sub-25 percent print is likely to be seen toward end-2014.”
“However, since the headline print is still expected to continue rising through August and, therefore, stray further away from the upper-end of the monetary authorities’ target for 2015, we believe they will still hike rates (both SDA and RRP) in their September 11, 2014 policy meeting,” he added.
The central bank recently said it still stands ready to adjust policy levers to keep a lid on commodity price increases driven by supply constraints.
The BSP’s Monetary Board over the last three consecutive monetary policy meetings has made adjustments to two of its policy levers to curb growth in money supply as a means to tame inflation and maintain stability in the financial system.
The Board decided at its March 27 meeting to raise the RRR for banks to 19 percent, then further to 20 percent at its May 8 meeting in a bid to siphon off excess liquidity from the financial system.
On June 19, the policy-setting body kept its key rate unchanged but increased the rate on the SDA facility by 25 basis points to 2.25 percent.