The Bangko Sentral ng Pilipinas may be compelled to raise interest rates at least one more time before the close of the year, if inflation rate continues to accelerate and go further beyond the upper limit of the target range of 2 percent to 4 percent, the local unit of Dutch financial giant ING Bank said Friday.
The bank’s observation was contained in a report a day after the Monetary Board, the policy-making body of Bangko Sentral, raised interest rates for the first time in four years on Thursday by 25 basis points to 3.25 percent.
The interest rates on overnight lending and deposit facilities were likewise raised by 25 basis points to 3.75 and 2.75 percent, respectively.
“… The central bank signals its readiness to act further to cap second-round effects as it raised its 2018 inflation forecast to 4.6 percent from 3.9 percent and to 3.4 percent from 3 percent in 2019,” ING Bank Manila senior economist Joey Cuyegkeng said.
“Further hikes are likely if upcoming data and developments indicate inflation remains elevated above the target range for an extended period of time,” he said.
Inflation in April further increased to 4.5 percent from 4.3 percent a month ago, driven mainly by price increases in the so-called “sin products,” which was notable after the government implemented the Tax Reform for Acceleration and Inclusion law in January.
The TRAIN Law cut personal income taxes but raised the excise taxes on alcohol, automobiles, tobacco and fuel.
However, Cuyegkeng said the next rates hike might occur in the fourth quarter of 2018. He said investors’ anticipation on the next policy move of the Bangko Sentral could result in the peso’s weakening against the greenback.
“The market has expected tightening since late last month which has insulated the peso from the recent weakness of emerging market currencies. However, with another rate hike less likely in the very near term and with weak external payments fundamentals, the peso would be volatile with a weakening bias,” Cuyegkeng said.
The peso weakened Friday at 52.19 from 51.80 Thursday.
The Bangko Sentral last tweaked the policy stance in September 2014 before the market-moving move on Thursday aimed a curbing the rising inflation.
Bangko Sentral Governor Nestor Espenilla Jr. said in raising the benchmark interest rates, the board considered a slew of vital economic data, such as the rising inflation, the 6.8-percent gross domestic product growth in the first quarter, possible increases in world oil prices and potential wage hikes in the fourth quarter of the year.
“The decision is based on the latest developments… the time to act is now. By acting right now, we will avoid a very strong action down the road,” Espenilla said in a briefing following the Monetary Board meeting.
He said in deciding to raise the policy interest rate, the board noted the latest forecasts had further shifted higher, an indication that inflation pressures could become more broad-based over the policy horizon.