The Bangko Sentral ng Pilipinas will likely raise its overnight borrowing rate by another 25 basis points to 3.75 percent before the end of the year to rein in inflation, Australia and New Zealand Banking Group Ltd. said.
ANZ said in a report the strong economic growth had resulted in persistent macro imbalances, including a higher inflation and a wider trade deficit.
“Recent tax reforms have added further to price pressures…We expect the Bangko Sentral ng Pilipinas to hike its policy rate by another 25 bps in November 2018. This follows the 50 bps of tightening hitherto this year,” ANZ said.
ANZ said with growth expected to remain high at 6.8 percent in 2018, macro imbalances would likely intensify in the Philippines. It said the most noteworthy impact of strong growth was observed on the trade deficit which surged 59 percent year-on-year between January and April this year.
“Strong growth momentum, together with other developments, including the lingering impact of tax reforms, elevated global crude oil prices, and a weaker peso, have raised price pressures in the system… We expect CPI inflation to average 4.6 percent in 2018, above the upper bound of the official target range of 2 to 4 percent,” it said.
“On monetary policy, we believe that further tightening is still necessary to rein in inflation. Accordingly, we continue to expect the BSP to hike its overnight reverse repurchase rate by 25 bps in November 2018, taking the cumulative hikes to 75 bps this year,” the bank said.
The Philippine Statistics Authority reported last week that inflation in June accelerated to a more than five-year high of 5.2 percent from 4.6 percent in May, triggered by faster increases in the prices of some food and beverage products.
The June inflation, based on the 2012 price index, was also faster than 2.5 percent a year ago. This brought the average inflation in the first half to 4.3 percent, beyond the government’s target range of 2 percent to 4 percent for 2018.
The June inflation was faster than the Department of Finance’s 4.9 percent projection for the month and the target range of 4.3 percent to 5.1 percent set by the Bangko Sentral ng Pilipinas.
Bangko Sentral Governor Nestor Espenilla Jr. described the higher-than-expected June inflation as a “setback,” adding that monetary authorities would review and update their situational assessment and forecast inflation path.
ING Bank Manila senior economist Joey Cuyegkeng said the high inflation point for June would likely require further monetary policy response as early as the August meeting.
“Real policy rate is deeper in the red indicating that a more aggressive economic policy response would be needed. Real policy rate is now -1.7 percent from -0.4 percent only in January,” Cuyegkeng said.
The policy-making body of Bangko Sentral ng Pilipinas raised for the second time this year the policy interest rates by 25 basis points to 3.5 percent on June 20.
The interest rates on the overnight lending and deposit facilities were also increased accordingly.