Three Asian central banks are due to meet next week but all thinking and no action means they are most likely to be non-events - though the Philippines central bank could steal the spotlight
The recent spike in Philippines’ consumer price inflation (CPI) above the central bank's 2-4% target has put monetary policy under the spotlight ahead of the March 22 policy meeting.
Inflation jumped to 4% year-on-year in January and further to 4.5% in February from 3.3% in 2017. The impact of tax reforms, rising food and utility prices are the main reasons which we expect to continue in the coming months.
However, Bangko Sentral ng Pilipinas's (BSP) policymakers have flagged their intention of not rushing into tightening to curb inflation. They argue that inflation would return to the target zone within the next 12 months and given the 12-18 months of policy lag, any tightening now would be ineffective anyway.
ING revises rate hike forecast
ING's economist for the Philippines, Joey Cuyegkeng expects inflation to peak within the next three to six month and expects no rate hike next week. He has also revised his forecast to no change from two 25bp rate hikes this year.
The stable monetary policy and widening trade and current account deficits will keep the Philippine Peso Asia’s underperforming currency this year.
Overseas Filipino workers’ remittances surged 9.7% year-on-year in January to $2.4 billion. But this does little to reverse the peso's weaker bias
BSP, the Philippine central bank, reported that the 9.7% YoY increase in cash remittances came from host economies with favourable economic activity. The US, Canada, Singapore, and the UAE posted significant increases. Remittances form the US increased 14.3% YoY and accounted for 4.6ppt of the overall growth. BSP also reported that remittances from Canada, Singapore and the UAE were responsible for another 4.6ppt of overall growth. Remittances from Europe are likely to recover this year as economies within the bloc continue to expand. Despite strong remittance growth in January, the amount still fell short of financing the trade deficit. The shortfall amounted to $938m. The three-month moving average shows a deterioration from September's excess of $94m to December’s shortfall of $1.1bn and January’s 3-month moving average shortfall of $1.2bn. We expect the shortfall to increase this year by at least $5.5bn from around $2bn in 2017. The underlying weak current account will continue to pressure the Philippine peso unless significant foreign direct investment- similar to last year’s $10bn inflow- is repeated this year.
Domestically driven economic growth reverses the trade surpluses of last year to a third straight month of deficit in February. A wider current account deficit is likely in 2018 which adds pressure on IDR.
Import growth remained strong at 25.2% annual increase in February but is still marginally slower than January's 27.9% annualized pace. Imports of capital equipment increased by 32% YoY while consumer goods imports surged to a 55.3% YoY increase. Export growth improved to 11.8% in February from January's upwardly revised increase of 8.6%. The improvement in exports resulted to a narrower trade deficit of $116m last month from January's deficit of $756m and December's deficit of $220m. The 2M 2018 trade balance turned into a deficit of $871m from the 2M 2017 surplus of $2.7bn. Efforts to increase household spending through a low inflation environment, government stimulus and subsidies, and infrastructure spending coupled with election-related spending should sustain the strengthening of domestic demand. Strong domestic demand results in more challenging trade and current account balances. We now expect the current account deficit to be wider this year, to -$21.2bn or -1.9% of GDP from 2017's deficit of -$17.3bn or -1.7% of GDP. These challenges should exert pressure on IDR. We expect IDR to trade weaker than the 2018 government budget assumption and the government's revised expectations.
Economic releases from Indonesia and Philippines reflect continued weakening bias on respective currencies as central banks are poised to hold monetary policies steady