BANGKO Sentral ng Pilipinas will likely to keep policy rates this week but may start tweaking its stance in August with a 25-basis point increase to prevent further weakening of the peso, DBS Bank of Singapore said Monday.
DBS in a report said on a nominal effective exchange rate basis, the peso had depreciated about 6.7 percent year-to-date (as of May 17), making it one of the worst performers in Asia
“At the same time, the current account balance has also slipped into a deficit. It is likely to widen going forward, assuming strong investment growth is sustained. While we are not overly concerned about the current account situation, it may affect sentiment on the peso,” DBS said.
“… Since April, the BSP seemed to be no longer tolerant of excessive weakening of the unit. Expect the BSP to raise its policy rate by 25 bps to 3.25 percent at its meeting on Aug. 10. If so, this will also be the first policy move under its new central bank governor,” the bank said.
Bangko Sentral Governor Amando Tetangco Jr. will end his second six-year term on July 2 and will be succeeded by Deputy Governor Nestor Espenilla Jr.
Latest data from Bangko Sentral showed that the current account, one of the vital components of the balance of payments, reversed to a deficit of $318 million in the first quarter this year from a surplus of $730 million a year ago, as the trade-in-goods deficit widened on the back of the faster growth in imports.
Meanwhile, the local currency’s weakest level was recorded on March 3, 2017 at 50.40 to a dollar. The peso on Friday closed at 49.90.
DBS said Bangko Sentral was expected to deliver another 25 basis points’ hike by year-end and pause till mid-2018. Thereafter, the bank said the risks for more hikes would depend on the success of the government’s infrastructure overhaul in generating demand.
“Public spending spurred strong investment growth in the economy. Investment growth has averaged 20 percent since 2015. And loan growth is currently back near its historical-highs of around 20 percent. If the government manages to push through its tax reforms, expect the expansionary fiscal policy stance to be sustained in the medium-term,” DBS said.
It said core inflation trend remained tilted toward the upside, adding core inflation might average 3 percent this year, compared with 1.9 percent last year. Inflation in the first five months averaged 3.2 percent, slightly higher than the midpoint of the target range of 2 percent to 4 percent this year.