S&P sees BSP hiking rates in line with Federal Reserve
THE BANGKO SENTRAL ng Pilipinas (BSP) will likely hike borrowing costs this year and next, with the regulator seen to adjust to a higher interest rate environment amid the anticipated monetary tightening by the US Federal Reserve, S&P Global Ratings said.
The global debt watcher said it expects the central bank to increase interest rates by as much as 50 basis points (bps) this year and in 2018.
“We forecast interest rates to go up. Our economists forecast...two 50-basis- point (bp) hikes in interest rates over the next two years. So 50 bps this year and 50 bps next year as well,” S&P credit analyst Ivan Tan said in a webcast on Wednesday.
Mr. Tan said the forecast is based on its expectations of higher US borrowing costs.
“We’re expecting another two 25-basis-point Fed rate hikes. So it’s more of a reaction. While the Philippine economy is doing quite well -- there’s a lot of FDI (foreign direct investment) inflows as well -- you want to maintain some sort of parity with the US interest rates so as to preempt any currency devaluation of capital outflows,” Mr. Tan said.
Latest data from the BSP bared February FDI net inflows rose 7% to $366 million from the $341 million in the comparable month a year ago, and slightly above January’s $685 million, reflecting investors’ optimism in putting more money on the country’s growth prospects.
“So our forecast of 50bps has mainly to do with maintaining parity with the Federal Reserve, or what we anticipate what the Federal Reserve to do this year,” Mr. Tan added.
The BSP has kept its monetary policy settings steady for 21 straight meetings or since a 25 bps hike in September 2014.
Citing CME Group’s FedWatch program, Reuters reported that market players are expecting a 49% chance the Fed to increase borrowing costs by at least two times this year.
The US central bank hiked interest rates during their March 14-15 policy review, the first tightening move this year and following an increase in borrowing costs was made in December 2016 after almost a decade of near-zero rates.
Investors are now betting on authorities to make their next move during their June Federal Open Market Committee meeting.
Meanwhile, the global debt watcher also noted that investor optimism and continuity in monetary and economic policies in the current administration are vital for the Philippine economy to continue expanding.
“I think the most important factor is the investors’ confidence in the Philippines. Domestic consumption has not changed, remittance has not changed -- those are the enduring strengths of the economy -- but if you look at the development between 2015 and 2016, the investment component or FDI has really picked up,” Mr. Tan said during Wednesday’s webcast.
“So the narrative has been quite positive and I think [President Rodrigo R.] Duterte has left the economic decisions and also the running of the central bank to the central bankers and not external appointees...and as long as this carries on, I think the economy and positive narrative will continue to be as such, as well.”
Mr. Duterte announced the appointment of BSP Deputy Governor Nestor A. Espenilla, Jr. as the new BSP governor last May 8, replacing two-termer Mr. Tetangco.
Mr. Espenilla is to take his seat as the new central bank chief early July.
The incoming central bank chief had vowed “continuity++” or a general policy continuity once he assumes the top post in July. -- JMDS