Just days ago, Philippine central bank governor Amando Tetangco waded into the debate over how policy makers should react to the turmoil in emerging markets, warning that tinkering with policy interest rates is “not necessarily the most appropriate response at this time.”
Soaring inflation at home, however, may leave Mr. Tetangco with little choice but to raise rates himself. Data out Wednesday — a day before the Bangko Sentral ng Pilipinas meets — showed the consumer price index rising 4.2% in January, its quickest gain in more than two years.
That prompted a warning that rate increases may not be far off. “We still have room to keep rates steady, but given how these factors play out, that room may be narrowing,” Mr. Tetangco said in a text message to reporters after the data release.
“We will see if any adjustments to the stance of policy are warranted based on the balance of these risks to the inflation outlook over our policy horizon.”
Granted, even in his comments last week Mr. Tetangco reportedly specified that he opposed rate moves in response to market volatility.
“Our primary focus for any policy adjustments remains the outlook on domestic inflation over the policy horizon,” he told Bloomberg.
But inflation is not rising in a vacuum. True, much of the jump can be traced to a string of disasters that hit the Philippines in the final quarter of 2013.
But part is due to the peso’s sharp decline in the latest emerging-market selloff: The Philippine currency is Asia’s worst performer this year after the Korean won, down more than 2% against the U.S. dollar since Jan. 1.
A weaker currency drives up the price of imported goods such as oil. Mr. Tetangco’s warning last week came after central banks in several important emerging markets — including Turkey, Brazil and South Africa — raised rates after a new bout of selling sent their currencies plunging.
That sparked fears of emerging-market contagion similar to the 1997 Asian financial crisis or last summer’s Fed-related selloff. It also prompted a debate about how developing economies should react to market turmoil.
Raising rates may keep some hot money from flowing out of the country, but it chokes off economic growth – something that could discourage more productive, longer-term investment.
No move is expected when the Bangko Sentral meets Thursday: Mr. Tetangco will want to keep rates low for as long as possible to give the economy time to digest the series of disasters that hit the Philippines at the end of last year.
Most severe was November’s Typhoon Haiyan, which killed more than 6,200 people and displaced four million more, causing an estimated $880 million in damages. The BSP last cut rates by a quarter-percentage point to 3.5% for borrowing and 5.5% for lending in October 2012.
That accommodative policy helped the Philippine economy grow 7.2% last year, the fastest rate in Asia after China.
Still, with CPI coming in above expectations for a second straight month and with higher utility costs and rising demand from developed markets on the horizon, the BSP can’t afford to be complacent.
HSBC economist Trinh Nguyen expects the central bank to look closely at whether price increases are driven by temporary factors or more structural pressures.
Ms. Nguyen expects the BSP to raise rates twice in the second half of the year, by a quarter-percentage point each time, though she says rates could rise even sooner if inflation threatens to breach the central bank’s 3%-5% target band.
“Things are heating up in the Philippines,” Ms. Nguyen said. ANZ Bank on Wednesday raised its full-year inflation forecast to 4.2% from 3.8%.
The bank has been calling for a half-percentage point increase in the second half of the year to guide inflation toward the BSP’s lower target band of 2%-4% in 2015, but said the bank could even decide to move in the second quarter if CPI continues to rise. Not everyone agrees that inflation is becoming a problem.
Credit Suisse expects the central bank to keep rates on hold all year unless inflation consistently exceeds 5%, or if it sees inflation driving wages higher, which can entrench price pressures. “We doubt either of these things will happen this year,” Credit Suisse economist Michael Wan said.
On Wednesday, Economic Planning Secretary Arsenio Balisacan said that without “major shocks,” consumer prices should moderate soon and keep headline inflation at an average of 4.4% for the year.
That would be well within the central bank’s target range – and give the BSP space to keep policy loose.
wsj.com
Soaring inflation at home, however, may leave Mr. Tetangco with little choice but to raise rates himself. Data out Wednesday — a day before the Bangko Sentral ng Pilipinas meets — showed the consumer price index rising 4.2% in January, its quickest gain in more than two years.
That prompted a warning that rate increases may not be far off. “We still have room to keep rates steady, but given how these factors play out, that room may be narrowing,” Mr. Tetangco said in a text message to reporters after the data release.
“We will see if any adjustments to the stance of policy are warranted based on the balance of these risks to the inflation outlook over our policy horizon.”
Granted, even in his comments last week Mr. Tetangco reportedly specified that he opposed rate moves in response to market volatility.
“Our primary focus for any policy adjustments remains the outlook on domestic inflation over the policy horizon,” he told Bloomberg.
But inflation is not rising in a vacuum. True, much of the jump can be traced to a string of disasters that hit the Philippines in the final quarter of 2013.
But part is due to the peso’s sharp decline in the latest emerging-market selloff: The Philippine currency is Asia’s worst performer this year after the Korean won, down more than 2% against the U.S. dollar since Jan. 1.
A weaker currency drives up the price of imported goods such as oil. Mr. Tetangco’s warning last week came after central banks in several important emerging markets — including Turkey, Brazil and South Africa — raised rates after a new bout of selling sent their currencies plunging.
That sparked fears of emerging-market contagion similar to the 1997 Asian financial crisis or last summer’s Fed-related selloff. It also prompted a debate about how developing economies should react to market turmoil.
Raising rates may keep some hot money from flowing out of the country, but it chokes off economic growth – something that could discourage more productive, longer-term investment.
No move is expected when the Bangko Sentral meets Thursday: Mr. Tetangco will want to keep rates low for as long as possible to give the economy time to digest the series of disasters that hit the Philippines at the end of last year.
Most severe was November’s Typhoon Haiyan, which killed more than 6,200 people and displaced four million more, causing an estimated $880 million in damages. The BSP last cut rates by a quarter-percentage point to 3.5% for borrowing and 5.5% for lending in October 2012.
That accommodative policy helped the Philippine economy grow 7.2% last year, the fastest rate in Asia after China.
Still, with CPI coming in above expectations for a second straight month and with higher utility costs and rising demand from developed markets on the horizon, the BSP can’t afford to be complacent.
HSBC economist Trinh Nguyen expects the central bank to look closely at whether price increases are driven by temporary factors or more structural pressures.
Ms. Nguyen expects the BSP to raise rates twice in the second half of the year, by a quarter-percentage point each time, though she says rates could rise even sooner if inflation threatens to breach the central bank’s 3%-5% target band.
“Things are heating up in the Philippines,” Ms. Nguyen said. ANZ Bank on Wednesday raised its full-year inflation forecast to 4.2% from 3.8%.
The bank has been calling for a half-percentage point increase in the second half of the year to guide inflation toward the BSP’s lower target band of 2%-4% in 2015, but said the bank could even decide to move in the second quarter if CPI continues to rise. Not everyone agrees that inflation is becoming a problem.
Credit Suisse expects the central bank to keep rates on hold all year unless inflation consistently exceeds 5%, or if it sees inflation driving wages higher, which can entrench price pressures. “We doubt either of these things will happen this year,” Credit Suisse economist Michael Wan said.
On Wednesday, Economic Planning Secretary Arsenio Balisacan said that without “major shocks,” consumer prices should moderate soon and keep headline inflation at an average of 4.4% for the year.
That would be well within the central bank’s target range – and give the BSP space to keep policy loose.
wsj.com
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