IMF: Timely action needed if inflation spikes

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DAVAO CITY: Monetary authorities should step in if consumer price growth exceeds expectations, the International Monetary Fund’s (IMF) Philippine representative said on Friday.

“If inflation pressures continue to go up, then the BSP (Bangko Sentral ng Pilipinas) should be ready to take action,” IMF Resident Representative Yongzheng Yang said at The Manila Times 7th Business Forum at the Marco Polo Davao.

The BSP’s policymaking Monetary Board should remain watchful, he said, given rising credit growth and the economy’s continued expansion.

“In that context, it is very important for the monetary authority to keep an eye [on]and make sure that inflation be maintained within the target,” he said.


IMF Resident Representative Yongzheng Yang. PHOTO BY RUSSELL PALMA

Breach expected
Inflation hit a three-year high in January and the Monetary Board on Thursday said it now expected the 2.0-4.0 target to be breached this year.

The forecast for 2018 was raised to 4.3 percent from 3.4 percent while that for 2019 was adjusted to 3.4 percent from 3.2 percent.

Some analysts had expected an adjustment during Thursday’s meeting but the Monetary Board said that its inflation expectations “continue to be anchored within the inflation target band over the policy horizon”.

The BSP’s overnight borrowing, lending and deposit rates were subsequently maintained at 3.0 percent, 3.5 percent and 2.5 percent, respectively, but the dominant view among analysts is that adjustments will have to be made later this year.

BMI Research on Friday said it expected a 50-basis point adjustment to be in place by the end of the year.

“Coupled with interest rate normalization in the US, which will likely continue to weigh on the Philippine peso, we forecast the BSP to hike its RRP by 50 bps to 3.50% by end-2018 to safeguard macroeconomic and currency stability,” the Fitch unit said.

“The BSP maintained the status quo at its meeting on February 8, but we believe that the window for further rate hold is quickly narrowing,” it added.

While BMI is keeping its 2018 inflation forecast at 4.0 percent, it said that monetary authorities would be forced to act given substantially higher consumer price growth.

“While the BSP expects the spike in inflation to be temporary and is reluctant to hike interest rates for now, we believe that price pressures are likely to average higher in 2018 than in the previous year,” it stated.

The pickup in price pressures goes beyond cyclical factors and is partially due to the sustained high credit growth “as a result of the ultra-accommodative monetary policy stance.”

“Together with higher oil and commodity prices, we expect inflationary pressures to remain elevated, and this will likely prompt the BSP to tighten its monetary policy to keep inflation under control,” BMI said.

It noted that the Philippine economy was growing strongly in excess of 6 percent in real terms and 8 to 9 percent in nominal terms, at odds with the 3.0-percent policy rate.

“If this situation is sustained for much longer, the economy is at risk of overheating and further heighten the risk of malinvestment,” BMI said.

‘Behind the curve’
It called out the BSP for being “increasingly behind the curve” by continuing to defer tightening.

“We highlight that the Philippine 2-year bond yield have risen considerably since Q316 and is now at around 100 bps above the central bank’s benchmark rate,” BMI said.

The peso, again one of the worst performing emerging market currencies, is also looking to retest near-term support.

A rise US bond yields and further Federal Reserve rate hikes this year will likely further push the peso down against the US dollar, BMI said.

WITH A REPORT FROM JORDEEENE B. LAGARE IN METRO MANILA

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