‘Overheating’ economy to prompt more rate hikes
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Wed, 12 Dec 2018 16:27:20 +0000
Monetary authorities will likely continue raising key interest rates next year in a bid to stabilize an “overheating” economy, Deutsche Bank said in a report.
The German lender’s view runs contrary to that of other analysts who expect the Bangko Sentral ng Pilipinas (BSP) to stop hiking rates after inflation began slowing in November.
The BSP’s policymaking Monetary Board — scheduled to meet for the last time this year on December 13 — has raised key interest rates for five consecutive times so far in 2018, for a total of 175 basis points, after inflation breached the 2.0-4.0 percent target beginning March.
Deutsche Bank claimed “the economy is overheating,” which means that the Philippines has been growing above potential in recent years.
“We would put potential growth at about 6 percent and third quarter saw the 14th consecutive quarter of above-6 percent growth,” it said, pointing to the July-September result of 6.1 percent.
The lender said strong domestic demand over the past three years had pushed core inflation to 4.9 percent in October, above the central bank’s 2.0-4.0 percent target, and would widen the current account deficit to possibly above 3.0 percent of gross domestic product this year.
“We don’t expect the fiscal stance to tighten materially next year, although we think the deficit will be smaller as a share of GDP. So the monetary authorities will carry the burden of trying to stabilize the economy,” it said, adding that the BSP could implement a rate hike in each of the first three quarters of 2019.
Deutsche Bank noted the real central bank policy rate was negative for most of the past 18 months and also probably 3 percentage points below neutral.
The lender also raised concerns over the central bank’s view that rice tariffication could help put the inflation back on track.
“Rice tariffication will help, but will not solve the Philippines’ inflation problem. The problem with this simple logic, though, is that it might take an infeasibly large volume of imports to drive rice prices down, especially since the prospect of cheaper imports will drive out local producers,” it said.
To get inflation stably back inside the 2.0-4.0 percent target band, Deutsche Bank said the economy would have to slow to below potential and stay there for a few quarters.
“With a few more rate hikes, we think that will happen although we don’t see headline inflation below 4 percent until 2020,” it added.
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