A rate hike in May? (2)

PHILIPPINES - In Brief 04 Apr 2018 by Romeo Bernardo

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Market concern over the BSP’s decision to keep policy interest rates on hold appears to be growing. An early warning is of overheating risks with continuing double-digit private sector credit growth and expectations of higher public sector spending and borrowing for its infrastructure building program. Then came criticisms that the BSP is “behind the curve” in influencing market rates as local yields climbed, reflecting expectations of rising inflation and continuing US interest rate hikes. Yesterday, we were asked by a GlobalSource reader whether in our view, “BSP is under political pressure not to raise rates?” With much thanks to the inquirer for his perceptive question, below we share our answer to him. No, we do not think there is political pressure. The BSP has enjoyed over 20 years of relative independence in conducting monetary policy and this presidency, despite its autocratic tendency, has shown little interest in interfering with economic management, evident in the recent appointment of Nesting Espenilla, a career central banker with no political ties, as governor. The market’s unease, I think, stems from Gov Espenilla’s (and other key members of the Monetary Board) seemingly greater tolerance for inflation risks compared with his immediate predecessor Amando Tetangco, a known inflation hawk who held the job for 12 years. For example, as we have written in the past, Gov Espenilla would not be too worried if the peso depreciates due to a growth-related current account deficit (in contrast to pure speculation) that reduces the country’s high foreign exchange reserves. Unlike in the 1990s, the Philippine economy today has less foreign exchange loans and its mai...