Private analysts watching the moves of the Bangko Sentral ng Pilipinas (BSP) said the central bank on Thursday appeared comfortable with its present policy settings but cautious of possible supply side risk to prices over the near term.
Given such risk, the BSP is seen eventually finding the pressure for a rate hike too strong to resist, although analysts differ on the timing of a lift-off.
“Even with inflation at multi-decade lows, the BSP appears comfortable with its policy stance,” a note by analysts at the United Kingdom-based investment bank Barclays said.
The central bank’s statement that the prevailing low inflation is “transitory” in nature and does not warrant a policy response makes it clear that while inflation does not pose a threat to the economy, the BSP is watchful of supply side shocks that could push up prices.
“There have been some signs that food production may come under pressure, as the Philippines recently announced it would miss its 2015 rice production targets, raising the likelihood of higher imports in order to ensure adequate stocks,” they said.
“Overall, despite the recent downtrend in inflation, domestic demand is expected to remain the key driver of activity, and we continue to expect the next policy decision to be a hike, only . . . later,” the note said.
Barclays analysts pointed out that benign inflation leaves room to keep policy on hold for the time being, especially with the recent weakness in the Philippine peso.
Given that, the analysts said they are pushing back Barclays’ forecast of a rate hike in the fourth quarter of 2015 to the third quarter of 2016, when election-related uncertainty should have been over, and inflation must have started to pick up.
SDA rate hike seen
“With domestic liquidity and inflation seen returning to the target [range]throughout the policy horizon, the BSP saw no immediate need to adjust its monetary policy tools to defend its inflation target,” the Bank of the Philippine Islands (BPI) said in an analysts’ note.
Taking into account firm domestic demand, the central bank decided that the Philippine economy did not require additional stimulus through monetary policy and opted against easing.
“The BSP may opt to unveil a number of macroprudential measures, possibly in key sectors like real estate to mitigate the chances of financial bubbles,” the BPI note said.
The BSP is calibrating its Term Auction Facility to complement its policy toolkit, slated for implementation possibly in mid-2016, which Governor Amando Tetangco Jr. indicated would facilitate the shift away from the high reserve requirement ratio regime, the analyst noted.
“Our central scenario remains for a BSP SDA [special deposit account]rate hike in the balance of 2015 in order to safeguard the inflation path going into 2016 as the Fed rate hike could foment domestic inflationary pressures,” the note added.