MANILA: The Philippine central bank, in its strongest hint that interest rates may be hiked soon, said on Thursday that "measured" adjustments in monetary policy may be needed even though it expects inflation to stay within its target.
Speaking ahead of a policy review on March 27, Bangko Sentral ng Pilipinas Governor Amando Tetangco told reporters an "early" and "gradual" adjustment in monetary policy stance rather than "discreet movements" would be less disruptive to businesses.
"Even as domestic inflation over the policy horizon remains within target, measured adjustments may be warranted given external developments including the heightened geopolitical risks that could result in volatility in international commodity prices," Tetangco said. Separately, Tetangco told Reuters policy adjustments may possibly involve key interest rates and other policy tools, though he did not elaborate. On Thursday morning, the peso was down, along with all emerging Asian currencies after Federal Reserve Chair Janet Yellen indicated a rate hike sooner than anticipated and the yuan dropped sharply.
After Philippine inflation unexpectedly slowed in February, economists took the view that the central bank would keep the overnight borrowing rate steady at a record low 3.5 percent next week.
But Tetangco's fresh comments could change views. "The governor is certainly sounding more hawkish, hinting at rates normalization," Trinh Nguyen, economist at HSBC, said after his Thursday remarks.
HSBC has previously forecast two rate hikes in the second half of 2014 "but the comments suggest that they may come earlier than expected," she said.
Emilio Neri, economist at the Bank of the Philippine Islands, said it was possible the central bank will raise both the policy rate and the special deposit account rate by 25 basis points next Thursday.
The consensus from a Reuters quarterly poll in January was for the central bank to start raising rates in the third quarter.
The overnight rate has been at a record low of 3.5 percent since October 2012 when it was cut by 25 basis points. Tetangco's comments came after Yellen said on Wednesday the Fed will probably end its massive bond-buying program this fall, and could start raising interest rates around six months later.
FED GUIDANCE 'POSITIVE'
"To the extent the Fed guidance points to steadying US growth, this is positive for rebalancing in global economic growth rates, in general, and the Philippines, in particular," Tetangco said.
"What we need to be mindful of now is that financial markets do not move excessively in one direction or the other as global interest rates normalize," he said On Tuesday, Tetangco said the scope for holding interest rates steady was narrowing although average annual inflation will settle within the government's 3-5 percent target range this year.
Annual inflation in the Philippine in February was 4.1 percent, above the mid-point of the central bank's target for the third month in a row. Policymakers expect inflation to average 4.3 percent this year against 3.0 percent in 2013.
On Wednesday, Barclays economist Prakriti Sofat said in a note the central bank may hike the overnight borrowing rate by 25 basis points to 3.75 percent in the second quarter, and by another 25 basis points in the third quarter.
"With the BSP more watchful on liquidity, we also believe that measures such as hikes in the SDA (special deposit account) rate or potentially in reserve requirement ratios are likely in the May policy meeting, with some risk of an adjustment next week," she wrote.
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