Bangko Sentral says policy space ‘narrowing’

MANILA, Philippines—The central bank hinted at an impending tightening of monetary policies for the first time in more than a year, as government data released on Wednesday showed that consumer prices rose by more than the expected rate in January.

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. noted a “narrowing” in policy space due to possible price pressures from within and outside the country.

“It’s too early to discern between temporary factors, which will abate, and underlying inflationary pressures. The BSP will likely opt to keep rates on hold when it meets on (Thursday),” HSBC economist Trinh Nguyen said on Wednesday.

He said there would likely be a rate hike in the coming months.

“Our expectation is that benchmark rates will be unchanged, but they can do a calibrated, preemptive response. They have a lot of things in their toolkit,” BDO chief market strategist Jonathan Ravelas said in an interview.

He said the most likely adjustment in policy settings would be a hike in reserve requirements for banks, which now stands at 18 percent. Reserve requirements refer to the minimum amount of deposits that banks must park at the BSP.

Data released by the government’s statistics office on Wednesday showed consumer prices rose by 4.2 percent in January, or near the top end of the BSP’s forecast of 3.4 to 4.3 percent. This was also faster than the 4.1 percent recorded in December.

The central bank’s official forecast for the entire year was set at 4.5 percent, or near top end of the 3-to 5-percent target range.

In a statement, Tetangco said the higher inflation in January might be a result of the weaker peso, which made imported products more expensive in peso terms.

“We will also remain watchful if any general price pressures from movements in financial markets are brewing,” he said.

“We still have room to keep rates steady, but given how these factors play out, that room may be narrowing,” Tetangco added.

The BSP’s benchmark overnight borrowing and lending rates have stood at record lows of 3.5 and 5.5 percent, respectively, since October 2012.

The central bank’s Monetary Board will meet Thursday to determine whether adjustments in interest rates or other macroprudential measures, such as reserve requirements for banks or yields for special deposit accounts, are warranted.

In a research note, Metropolitan Bank & Trust Co. said it was expecting consumer prices to stay elevated in the first half of the year due to stronger demand for food and a possible increase in power rates in Metro Manila.

Metrobank sees inflation rate averaging at a “manageable” 4 percent this year or lower than the BSP’s own forecast.

“Consensus expects no change in policy rates,” the bank’s research group said.

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