Philippine central bank keeps policy tools on hold, likely hike rates in March

The Philippine central bank, BSP, kept its policy tools on hold today, consistent with market projections. However, the window to keep the policy stable is narrowing rapidly. BSP kept its interest rate corridor at 2.50 percent, 3 percent and 3.50 percent, while the reserve requirement ratio was maintained at 20 percent.

Inflation projections based on a survey of private sector participants have risen to 4.34 percent year-on-year for this year and 3.49 percent in 2019, after the implementation of the tax reform. This indicates towards an overshoot from the central bank’s 2 percent to 4 percent inflation target in 2018. If realized, it would be the first overshoot since 2008.

The BSP highlighted that it continued to be wary of second-round impacts of the tax reform. At this point, it anticipates inflation to come within its target range in March 2019, even as it flagged the risk of increased oil prices. This appears to be a shift in tone from the December review when the central bank anticipated the tax reform to have tempered effect on inflation.

Price pressures seem to have been building up even before the adjustment in excise taxes. The recent sharp rise in core inflation validates a wide increase in consumer prices. The engrained strength in domestic demand is expected to keep inflation pressure solid, as opposed to the BSP’s stance that the price drivers are temporary, noted ANZ in a research report.

“We expect the central bank to commence policy tightening, starting with a 25bps hike in March. For now, we expect cumulative hikes of 50bps in March and May. However, there is a risk of a longer tightening cycle if inflation continues its ascent”, added ANZ.

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