First pause after raising policy rate five times by a total 175 basis points

After five straight meetings of rate hikes since May 2018, Bangko Sentral ng Pilipinas (BSP) decided to maintain its main policy rate at 4.75% in the December meeting. The corresponding interest rates on the overnight lending and deposit facilities were also kept unchanged at 5.25% and 4% respectively. According to the central bank, the decision made was mainly due to the moderation in inflation, which improved from a nine-year high of 6.7% yoy in September to 6% in November (6.7% in October). BSP also highlighted that “inflation expectations have also steadied given the decline in international crude oil prices and the stabilization of the peso”. The official target inflation rate is projected to be in a range of 2-4% for 2019-2020. Similarly, the country’s core inflation rose from 4.9% yoy in October to 5.1% in November. As a result, if inflation rate continues to remain high, we believe BSP is likely to tighten monetary policy further, but we believe BSP will raise its rate gradually from here on, and will continue to monitor external economic environment closely before the next rate hike.

In the same week, Philippines exports growth rose from 0.8% yoy in September to 3.3% in October, albeit slightly lower than market expectations of 3.6% increase. The growth was supported by higher demand for manufactured goods, which accounts for close to 90% of total exports, expanding by 5.7% yoy in October (0.2% yoy in September). Nevertheless, exports of electronic products remained weak, slowing down from 4.2% yoy in September to 0.6% in October, as components devices and semiconductor dragged down growth. This was in tandem with slower global semiconductor sales reported by Semiconductor Industry Association (SIA) for the same month, which slowed to 12.7% yoy in October vs 15.1% in September. Meanwhile, exports of agro products and mineral products declined by 13.7% yoy and 7.1% respectively in October. In terms of exports by destination, shipments to US, the largest trade partner with a 16.3% share of total exports in October, rose further by 18% (12% in September), while exports to EU region turned around from -28.3% yoy in September to +9.5% in October.

Separately, Singapore’s retail sales slowed from 1.9% yoy in September to 0.1% yoy in October, lower than market expectations of 1.5%. The weak growth in retail sales was contributed mainly from lower purchase of motor vehicles, which fell by -2% yoy in October (2.6% in September). Excluding motor vehicles, retail sales grew by 0.5%, but still weaker than the prior month, underlining subdued domestic demand environment in the country. In contrast, retail sales in petrol service stations posted a strong growth of 11.4% yoy in October, on the back of high petrol prices during the month. In the latest survey by the Monetary Authority of Singapore (MAS), Singapore's real GDP growth is expected to expand by 3.3% in 2018, as compared with 3.6% in 2017.

Source: Affin Hwang Research - 14 Dec 2018