The Philippines is stepping up its inflation watch as recent peso weakness boosts risks, central bank Governor Amando Tetangco said, signaling policy makers could have less room to hold interest rates at a record low.
“Inflation is expected to be within target, but there are risks which are tilted to the upside,” Tetangco, 61, said in an hour-long interview in his office in Manila today. “Potential increases in food prices and utility rates due to some supply-related concerns could result in higher inflation than current forecasts.”
An 8.9 percent decline in the peso in the past 12 months is adding to price pressures, with the monetary authority watching out for any threat to the inflation outlook even as it sees no urgency to change the policy stance at the moment, Tetangco said. Bangko Sentral ng Pilipinas will probably raise its benchmark interest rate to 4 percent by the fourth quarter of this year from 3.5 percent now, Bloomberg surveys show.
“If BSP sees that the weaker peso, combined with the nation’s susceptibility to calamities, will lead to persistent inflation above 5 percent, we could see monetary tightening as early as the third quarter,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “BSP probably won’t wait for 2015 to make policy adjustments if they see that inflation will far exceed the target.”
The peso rose 0.2 percent to 44.6 per dollar at the close, according to Tradition Financial Services. The currency slid to the lowest in more than three years last week as investors remain cautious over the tapering of stimulus by the Federal Reserve and its impact on emerging markets. The Philippine Stock Exchange Index gained 1.7 percent today.
Bangko Sentral has held the benchmark since October 2012. The monetary authority last year cut the rates on special deposit accounts to 2 percent and restricted access to the funds as the BSP shifted toward an interest-rate corridor approach.
Inflation quickened to 4.1 percent in December, the fastest pace in two years, after Super Typhoon Haiyan struck in November and damaged crops. The central bank last month forecast price gains to average 4.5 percent in 2014 and 3.24 percent in 2015. The impact of the storm has been factored into the estimates, Tetangco said today.
Philippine policy makers are watching “for any threat to the inflation outlook that can emanate from the peso,” Tetangco said. Recent peso depreciation will likely be tempered by economic growth, a comfortable level of reserves, foreign-exchange inflows from overseas workers, portfolio investments and foreign direct investment, he said.
Indonesia this month kept interest rates unchanged for a second straight meeting, while the Bank of Thailand unexpectedly cut its benchmark in November to bolster growth as anti-government protests escalated.
Philippine President Benigno Aquino is increasing spending to a record this year while seeking more than $8 billion of investments in highways and airports to improve infrastructure and create jobs. The nation last year won its first investment-grade scores from Moody’s Investors Service, Fitch Ratings and Standard and Poor’s.
Haiyan, which struck Nov. 8, killed more than 6,100 people, damaged farms, roads and an entire city in the Visayas group of islands. Globe Telecom Inc., the country’s second-largest telecommunications company, said in December revenue growth in the fourth quarter may be damped on reduced demand from subscribers in provinces hit by the storm.
Philippine gross domestic product rose 7 percent in the third quarter from a year earlier, the weakest pace in more than a year. The government targets GDP growth of 6.5 percent to 7.5 percent this year, and is scheduled to report data for the three months through December on Jan. 30.
“Based on what we’ve seen, it looks like output expansion can be sustained over the coming quarters,” Tetangco said.