Philippines

Bracing for a more hawkish tone

The central bank left its benchmark interest rate unchanged by capping the overnight reverse repurchase rate at 3.00%. This fell in line with our expectation though some were of the view that it will raise rates by 25bps. Though we felt the central bank is less convinced to raise rates now, we are bracing for a shift to a hawkish tone as a prelude to a rate hike in March. This will take place only if the central bank recognizes the risk that inflation will only drift higher from here when the second-round effect kicks in strongly.

• The central bank left its benchmark interest rate unchanged by capping the overnight reverse repurchase rate at 3.00%. This fell in line with our expectation though some were of the view that the central bank will raise rates by 25 basis points (bps) since inflation for 2018 is expected to be on the uptrend.

• But we believe the room for the central to hold rates at current level is getting narrower. Inflation pressure is getting stronger, coming from oil prices, the peso’s weakness and firm domestic demand which increase the risk of secondround effects. January inflation of 4.0% is the highest since October 2014 from 3.3% in December 2017 and is also higher than the 2018 average of 3.3%.

• The other risk is capital outflow. If the US Fed steps up its pace of rate hikes in 2018, the Philippines central bank will need to raise rates in order to fend off capital outflows. Other than the Philippines, we believe India and Indonesia are somewhat more vulnerable to capital outflows.

• We are now bracing for a shift to a hawkish tone by the central bank as a prelude to a rate hike in March. This will take place only if the central bank recognizes the risk that inflation will only drift higher from here when the second-round effect kicks in strongly.

UK

BOE turns more hawkish

While maintaining the policy rate at 0.5%, the central bank has turned more hawkish. The Bank of England (BOE) has signalled the need for an earlier interest rate hike and potentially, larger than previously predicted. We were initially looking at one rate hike of 25 basis points (bps) in November. Now we expect the rate hike to be as early as May if not August. Room for the rates to move up twice in 2018 cannot be ruled out, reaching 1.00% to 1.25%. For that to happen, there must be a strong conviction that the economy is doing well and is being backed politically.

• As expected, the Bank of England (BOE) left the policy rate unchanged at 0.5% during the first MPC in 2018. However, the central bank has signalled the need for an earlier interest rate hike and potentially, larger than previously predicted. We were initially looking at one rate hike of 25 basis points (bps) in November.

• The hawkish tone by the central bank seems to signal that it is preparing the markets for higher borrowing costs given that the domestic economy is expected to grow more broadly on the back of improved global growth. Also the rate hike is seen necessary to ensure inflation returns to its target of 2.0% as domestic cost pressures are on the rise as wages look set to improve.

• We now expect the central bank to raise interest rates either in May or August as opposed to our earlier view of November. Room for the rates to move up twice in 2018 cannot be ruled out, reaching 1.00% to 1.25%. For that to happen, there must be a strong conviction that the economy is doing well and is being backed politically.

Source: AmInvest Research - 9 Feb 2018