Philippines may hike key rate again

Japanese investment house Nomura expects the BSP to follow up last Wednesday’s tightening move with another 25-basis point hike at its next meeting in August, which will bring the overnight borrowing rate to 3.75 per cent.
British banking giant HSBC, however, said inflationary pressures had started to ease.
“We still expect headline inflation to peak on a yearly basis in the second half of 2018, but mainly due to base effects and higher oil prices, which we believe aren’t reason enough for additional monetary tightening,” according to an HSBC research note issued after the BSP’s June 18 policy setting.
For its part, Nomura’s separate research note argued that while the BSP had lowered its inflation forecasts to 4.5 per cent from 4.6 per cent for 2018 and to 3.3 per cent from 3.4 per cent for 2019, inflation risks remained tilted to the upside from petitions to raise wages |and transport fares, while |inflation expectations were still elevated.
“The BSP noted it was ready to take further policy actions as needed. 
“This suggests the BSP has left the door open to more rate hikes, in line with our view and our conclusions from a recent discussion with governor Nestor Espenilla Jr,” Nomura said.

Rising inflation
Nomura expects inflation to keep rising in the coming months, averaging 5.1 per cent in the third quarter from 4.7 per cent in the second quarter.
HSBC said the BSP’s rate hike last Wednesday was different from that in May, which was primarily domestically driven to curb inflation and inflation expectations.
The last hike, HSBC noted, was driven more by the external environment, particularly the US Federal Reserve’s hawkish tone.
“But surely, inflation was still a factor in the decision. The BSP expects that the rate hike could do its part to curb inflation expectations following the rate hike in May. This is significant given mounting pressure for wage hikes. But it’s also worth noting that inflationary pressures have started to ease. 
The May inflation print came in notably lower than market expectations as food and housing prices declined sequentially after consecutive months of high growth,” HSBC noted.
One of the key things to watch for domestically is second-round impacts from the tax reform in the form of rising wages, HSBC continued.
“Any significant increases in minimum wages and/or broad-based wage hikes across the board would likely trigger even higher prices that would prompt the BSP to hike rates further. 
“We would note, however, that the recently passed minimum wage hikes in the Visayas region have all been within the BSP’s forecast range of 20 pesos (Bt12) or less, which exudes policy coordination between the different government agencies,” HSBC noted.
“Continued coordination of minimum wage hikes with other regions, particularly in the National Capital Region (NCR), would help contain demand-pull inflation and ease pressure for further monetary tightening.”