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PSE index declines amid hawkish Fed, BSP fears

THE MAIN INDEX dropped to the 6,000 level on Tuesday as investors expect the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP) to keep benchmark rates high amid growing inflation risks.

The Philippine Stock Exchange index (PSEi) went down by 76.60 points or 1.25% to end at 6,047.97 on Tuesday, while the broader all shares index dropped by 34.94 points or 1.05% to close at 3,274.30.

“The index fell to its lowest close in more than a year on concerns that rising oil prices and other inflationary pressures will force the BSP and Federal Reserve to keep policy rates elevated for longer,” China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message.

“Both central banks are widely expected to hold rates steady during their meetings this week, but growing uncertainty about the path of interest rates over the next several months has soured investor sentiment on local equities,” he added.

Shares went down due to “heightened risk-off appetite” ahead of the policy meeting of the Federal Reserve this week, China Bank Securities Corp. Research Associate Lance U. Soledad said in an e-mail.

The Fed will hold its policy meeting on Sept. 19-20.

Markets expect the US central bank to keep rates unchanged after it hiked its target rate by 25 basis points (bps) to the 5.25% to 5.5% range at its July meeting.

The Fed has hiked rates by a total of 525 bps since it began its tightening cycle in March 2022.

Meanwhile, the BSP will hold its own review on Sept. 21, Thursday.

A BusinessWorld poll conducted last week showed 14 of 17 analysts expect the Monetary Board to keep the policy rate at a near 16-year high of 6.25% at its meeting this week.

The central bank raised borrowing costs by 425 bps from May 2022 to March 2023 to tame inflation, but has since paused for three consecutive meetings.

International oil prices rose on Tuesday, extending the streak of increases for four straight sessions as oil output from shale-producing regions is projected to fall to 9.393 million barrels per day in October, Reuters reported.

US West Texas Intermediate crude rose by 98 centavos or 1.1% to $92.46 per barrel by 0615 GMT, while Brent crude rose by 46 centavos or 0.49%  to $94.89 per barrel.

All sectoral indices ended lower on Tuesday. Property dropped by 54.76 points or 2.17% to 2,458.01; holding firms declined by 83.65 points or 1.42% to 5,781.68; industrials went down by 99.87 points or 1.13% to 8,692.52; services fell by 10.49 points or 0.7% to 1,479.85; mining and oil lost 70.53 points or 0.67% to close at 10,325.55; and financials inched down by 6.35 points or 0.35% to 1,767.46.

Value turnover inched up to P3.65 billion on Tuesday with 596.63 million shares changing hands from the P3.64 billion with 549.70 billion issues on Monday.

Decliners outnumbered advancers, 128 versus 62, while 43 names closed unchanged.

Net foreign selling climbed to P566.33 million on Tuesday from P419.26 million on Monday. — SJT with Reuters

#PSE #index #declines #hawkish #Fed #BSP #fears

Analysts’ Expectations on Policy Rates (September 2023)

BSP likely to maintain pause — poll

By Keisha B. Ta-asan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely hold interest rates steady for a fourth straight meeting on Thursday, amid slowing economic growth.

A BusinessWorld poll conducted last week showed 14 of 17 analysts expect the Monetary Board (MB) to maintain the policy rate at a near 16-year high of 6.25% despite the inflation uptick in August.

On the other hand, three analysts see the BSP raising borrowing costs by 25 basis points (bps) at the Sept. 17 meeting to preemptively ward off inflationary pressures. If realized, this would bring the target reverse repurchase (RRP) rate to 6.5%.

“I’m expecting the MB to hold (this week), despite the surprise uptick in inflation in August. I highly doubt the latest print will spook members into further action (i.e. another hike); it was well within their target range and their official response to the actual data was fairly nuanced and reasonable, expecting disinflation to resume going forward,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

Headline inflation unexpectedly quickened for the first time in seven months to 5.3% in August, but within the BSP’s 4.8-5.6% forecast range for the month. Inflation averaged 6.6% in the eight-month period.

“We expect the BSP to keep its policy rate steady at 6.25%. Concerns on growth will likely be front and center,” HSBC Global Research Association of Southeast Asian Nations (ASEAN) economist Aris Dacanay said in an e-mail.

Philippine gross domestic product (GDP) grew by a slower-than-expected 4.3% in the second quarter from the 7.5% a year ago.

For the first semester, GDP growth averaged 5.3%. This was well below the government’s 6-7% target for the year.

Mr. Dacanay said bank lending has also been growing at its slowest pace since the global financial crisis in 2009, barring the coronavirus pandemic in 2020.

BSP data showed outstanding loans of universal and commercial banks, net of RRP placements with the central bank, rose by 7.7% to P11 trillion in July. Loan growth in July was the weakest increase since April.

Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said the temporary spike in prices last month is “transitory” and should not prompt another rate hike from the BSP.

China Banking Corp. Chief Economist Domini S. Velasquez said inflation expectations are still well anchored.

“We estimate that inflation could still be on track to reach the BSP’s 2-4% target range by the fourth quarter if domestic supply pressures are addressed in a timely manner,” she said.

Ms. Velasquez said the price ceiling on rice will likely help ease inflationary pressures for September. “Hopefully, the expected delivery of imported rice and harvest this end-September should help ease price pressures,” she added. 

A recent spike in rice prices prompted the Marcos administration to impose a price ceiling on regular milled and well-milled rice at P41 and P45, respectively, starting Sept. 5.

University of Asia and the Pacific (UA&P) Senior Economist Cid L. Terosa said the MB will also keep in mind the US Federal Reserve’s next policy decision.

The US central bank is widely expected to keep rates unchanged at the conclusion of its two-day meeting on Sept. 20.

Ms. Velasquez said the Fed could potentially bring its aggressive monetary tightening cycle to an end.

“If realized, this would maintain the current 75 bps interest rate gap and alleviate downward pressure on the peso,” she said.

The peso closed at P56.815 on Friday, depreciated by five centavos from its previous finish of P56.765 against the dollar. Year to date, the peso weakened by 1.8% or P1.06 from its P55.755 close on Dec. 29, 2022. 

“Nonetheless, the policy call will likely be a tough one. Risks to inflation are significantly tilted to the upside with global rice prices rising almost vertically by more than 20%,” HSBC’s Mr. Dacanay said. 

While food inflation may ease in September due to the rice price ceiling, he said the policy response after that is still uncertain.

“We think the BSP will first monitor what the final policy will be before considering a continuation of its tightening cycle. Nonetheless, there is a risk that the BSP preempts any second-round effects by hiking policy rates in anticipation of the price pressures ahead,” he said.

Meanwhile, Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co. said a 25-bp rate hike on Thursday will be a “calibrated preemptive response to inflation headwinds.”

Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez also expects a 25-bp rate hike due to rising prices of basic commodities, particularly agricultural products, as well as fuel.

From the second week of July to September, oil firms have raised fuel prices by P9.85 per liter for gasoline, P14.05 per liter for diesel and P13.45 per liter for kerosene.

“Not to mention the impending surge in demand brought about by the forthcoming holiday spending. The increase in prices has affected not only food products but across all commodities in the market,” Mr. Lopez added.

Alvin Joseph A. Arogo, an economist from the Philippine National Bank, said the BSP will likely keep borrowing costs steady for the rest of the year.

“This is appropriate given the relatively weaker economic growth outlook and inflation can still fall below 4% by the fourth quarter of 2023,” he said.

The BSP sees inflation averaging 5.6% in 2023, before easing within the 2-4% target to 3.3% in 2024 and 3.4% in 2025.

“If the currency continues to substantially weaken, however, then the central bank may need to temporarily sacrifice supporting expansion until the peso stabilizes. As such, a final 25-bp hike this year still has a fair chance of happening, whereas a rate cut is very unlikely,” Mr. Arogo said. 

Mr. Terosa said the BSP may take its cue from the US central bank’s next moves.

“Of course, unexpected policy decisions by the Fed in the remaining months of the year can pressure the BSP to change its policy stance,” he said.

Mr. Dacanay said the dollar may experience renewed strength in the coming months, putting pressure on the BSP to keep policy rates high for a longer period to support the peso.

“We continue to expect the BSP to only cut its policy rate only after the Fed cuts its own,” he said. 

Meanwhile, Mr. Chanco said there is still a “decent chance” the BSP will start cutting policy rates within the fourth quarter to support the economy.

“This is, however, contingent on inflation returning to the BSP’s target range in October or November,” he said.

After the Sept. 21 meeting, the MB’s next policy reviews are scheduled for Nov. 16 and Dec. 14.

#BSP #maintain #pause #poll

PHL stocks to take cue from BSP, Fed meetings

STOCK MARKET investors are expected to keep a close eye on the policy meetings of the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP) this week.

The benchmark Philippine Stock Exchange index (PSEi) lost 82.06 points or 1.32% to end at 6,126.34 on Friday, while the broader all shares index slipped by 33.13 points or 0.98% to 3,320.18.

Week on week, the PSEi went down by 96.60 points or 1.55% from its close of 6,222.94 on Sept. 8.

“Hopes that both the Fed and the BSP will keep their policy rates unchanged may somehow give market sentiment a boost,” Philstocks Financial, Inc. Senior Research Analyst Japhet Louis O. Tantiangco said in a Viber message. 

“Dovish signals are seen to lift the market while hawkish signals may pull the market down.”

The Federal Open Market Committee (FOMC) is widely expected to keep rates unchanged at the end of its two-day policy meeting on Sept. 20. The US central bank raised borrowing costs by 25 basis points (bps) in July, bringing the Fed Funds target rate at 5.25% and 5.5%.

Meanwhile, the Monetary Board (MB) is scheduled to hold a policy-setting meeting on Thursday. The MB has kept rates unchanged at a near 16-year high of 6.25% during its last three meetings.

BSP Governor Eli M. Remolona, Jr. on Thursday said a policy rate hike is unlikely despite the uptick in August inflation.

A BusinessWorld poll last week showed 14 of 17 analysts see the Monetary Board keeping benchmark rates steady, while three analysts expect a 25-bp rate hike.

“Post-monetary policy meeting price action could drive longer-term trend. We may see the market start (this week) with gains, given the removal of selling pressure from FTSE (Financial Times Stock Exchange) rebalancing-related flows,” China Bank Securities Corp. Research Associate Lance U. Soledad said in an e-mail on Friday.

Mr. Tantiangco said investors may also take their cues from the release of the BSP’s Business and Consumer Expectations Surveys on Friday.

For the rest of the week, Mr. Soledad said volatility is expected to be elevated ahead of and following the FOMC and the MB’s policy meetings.

“Should we see upbeat price action after these key events, then that could indicate that a near-term trough had been reached and could significantly improve buying appetite — warranting more active accumulation in index heavyweights,” Mr. Soledad said.

The PSEi is expected to test the 6,150 level.

“If the market is able to get back above the said line, it is seen to continue trading within 6,150-6,400. If it fails to do so, however, the market’s new trading range is seen from 6,000-6,150,” Mr. Tantiangco said.

For this week, Mr. Soledad placed PSEi’s resistance at 6,350-6,370. — S.J.Talavera   

#PHL #stocks #cue #BSP #Fed #meetings

BSP sees within-target inflation by Q1

BSP sees within-target inflation by Q1

INFLATION is now likely to land within the Bangko Sentral ng Pilipinas’ (BSP) target by the first quarter of 2024, not the fourth quarter of this year, BSP Governor Eli M. Remolona, Jr. said.

“We’re not quite clear about the fourth quarter (of 2023) yet. We’re still looking at the way our tightening measures have been working their way through the economy on the demand side. We’re not sure about the fourth quarter because if there are further supply shocks, then the numbers will be different,” Mr. Remolona said in an interview with BusinessWorld Editor-in-Chief Wilfredo G. Reyes on Sept. 4, a day before the government reported a faster-than-expected 5.3% inflation for August.

BusinessWorld’s one-on-one interview with Mr. Remolona will be streamed on BusinessWorld and The Philippine Star’s Facebook pages, as well as the BusinessWorldTV YouTube page, at 11 a.m. today (Sept. 8).

“My best guess is it will be the first quarter of 2024, before we get into the (2-4%) target range,” Mr. Remolona said.

The BSP will likely upwardly revise its full-year forecast of 5.6% for 2023 at the next policy meeting on Sept. 21, he said.

Inflation unexpectedly accelerated for the first time in seven months in August, as food and transport costs rose. The consumer price index (CPI) quickened to 5.3% in August from 4.7% in July, above the 4.9% median estimate in a BusinessWorld poll conducted last week.

August marked the 17th consecutive month that inflation surpassed the central bank’s 2-4% target range. 

For the first eight months of 2023, inflation averaged 6.6%.

Mr. Remolona said the central bank still has space for further tightening.

“If inflation continues to be an issue, then we could raise policy rate from 6.25% to a higher policy rate. If we think the tightening is already very effective, then we wouldn’t need to increase further,” he said.

The BSP has kept its key policy rate at a near 16-year high of 6.25% for the last three meetings. It has hiked benchmark interest rates by 425 basis points (bps) from May 2022 to March 2023 to curb inflation.

Aside from inflation, Mr. Remolona said the Monetary Board will also be taking into account recent economic output data at its next policy-setting meeting on Sept. 21.

“That (output data) for us is an indicator of how much we’ve done on the demand side to compensate for the pressures from the supply side,” he said.

“We could still hike. We have a sense of how high we can hike before growth becomes an issue, we compute what we call the natural rate and we’re still below the natural rate. We have room to hike because of our calculations.”

Mr. Remolona said the Philippine economy can still grow by 6% this year, the lower end of the 6-7% growth target for 2023, if the government ramps up spending.

Gross domestic product grew by a slower-than-expected 4.3% in the second quarter, partly due to government underspending. This brought the six-month average to 5.3%, still below the government’s 6-7% target this year.

Meanwhile, Mr. Remolona said the US Federal Reserve is still hawkish, but the Jackson Hole speech by Chairman Jerome H. Powell in August had more uncertainty compared with the previous Federal Open Market Committee (FOMC) statement.

“But I think, in my opinion, they’re slightly behind the curve in terms of tightening. I think we’re closer to being on track in terms of tightening,” he added. 

The US Federal Reserve hiked borrowing costs by 25 bps at its meeting in July. This brought the Fed funds rate to 5.25-5.5%, its highest level in 22 years.

The next meeting of the FOMC is scheduled for Sept. 19-20.

Mr. Remolona, however, noted that several financial crises occurred after the Fed raised its policy rate “very sharply.”

“In November 1994 for example, for the first time the FOMC raised its policy rate by 75 bps, within a few months we saw the Tequila crisis. And within the two years we saw the Asian (financial) crisis,” he said.

“This time, the FOMC has been even more aggressive than it was in 1994, so this makes me worried about what might happen down the road,” he said.

Earlier this year, markets around the world were rattled by the back-to-back collapse of Silicon Valley Bank (SVB) and New York’s Signature Bank. A crisis of confidence also hit Credit Suisse, which resulted in a state-led rescue by its Swiss rival UBS Group. 

“We already saw SVB, we already saw Credit Suisse, I’m concerned that there may be further financial accidents in the future. I think what high levels of interest rates do is they make the floor more slippery for banks and so they make accidents, or slips, more likely to happen,” Mr. Remolona added. — Keisha B. Ta-asan

#BSP #sees #withintarget #inflation

BSP shifts to variable rate repo auction

BSP shifts to variable rate repo auction

THE BANGKO Sentral ng Pilipinas (BSP) will shift to a variable rate format in the auction for the overnight reverse repurchase (RRP) facility starting Friday (Sept. 8), as well as introduce a formal operational target called the “Overnight (ON) RRP Rate.”

Similar to the existing BSP securities facility or the BSP bill auction, the variable rate format for the RRP will have a pre-determined offer volume.

BSP Governor Eli M. Remolona, Jr. in a statement on Monday said  an operational target is a market-determined, short-term interest rate that a central bank can “guide” on a daily basis to reflect the current monetary policy stance.

“For the BSP, the shift to variable rate RRP auction format will yield a market-determined rate for overnight funds, the ON RRP Rate, that conveys the results of the daily RRP auctions,” he said.

The BSP chief noted that the ON RRP Rate is an appropriate operational target due to the regularity of RRP auctions and market players’ familiarity with the instrument.   

Earlier in June, the BSP created the overnight rate as the benchmark for determining short-term interest rates amid the phaseout of the London Interbank Offered Rate (LIBOR).

Meanwhile, Mr. Remolona said that in the shift to a variable rate auction format, the BSP’s monetary policy rate would now be called the “Target RRP Rate.”

He said the BSP would signal its monetary policy stance through the Target RRP Rate. The rate will also be set after each policy review of the Monetary Board, similar to the central bank’s prevailing practices.

The RRP facility will also remain as the BSP’s primary monetary policy instrument, Mr. Remolona said.

“The ON RRP Rate is expected to move closely around the Target RRP Rate. Deviations of the ON RRP Rate from the Target RRP Rate will reflect changes in liquidity conditions from time to time, or when deviations from the liquidity forecasts occur,” he said.

Still, the ON RRP Rate should revert and move in accordance with the policy rate over time, as the RRP auction size is adjusted based on observed demand, he said.

“As the market familiarizes itself with the operational target, the ON RRP Rate will carry useful information on liquidity conditions and how they relate to the prevailing stance of monetary policy,” Mr. Remolona said.

“Thus, the introduction of an explicit operational target will provide monetary authorities an important market-based indicator that can help in assessing the effective stance of monetary policy,” he said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP would now set the Target RRP Rate based on their preferred stance. It will then report a prevailing daily rate that reflects liquidity conditions and demand.

“If the ON RRP Rate is lower than the Target RRP Rate, the BSP may look to increase auction volumes to drain more liquidity that leads to tighter financial market conditions, which would cause rates to rise,” he said. 

“But if the ON RRP Rate is higher than the Target RRP Rate, the BSP may look to downsize auction volumes to allow liquidity buildup, which in turn will push rates closer to the Target RRP.”

The BSP also noted that the changes in the RRP facility are part of the central bank’s set of planned reforms during the adoption of the interest rate corridor (IRC) framework in 2016. 

These changes are largely operational and do not constitute any shift in the BSP’s monetary policy stance, Mr. Remolona said. It will also enhance the transmission of monetary policy.

“The shift to the variable rate auction format will also help strengthen the price discovery process by providing market participants and monetary authorities alike a market-determined interest rate that conveys the prevailing cost of and demand for overnight funds in the financial system,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the changes are part of the development of a credible, market-determined funding rate that will be determined by market forces daily.

“The yield curve (should be) more realistic and credible for market players, instead of being distorted and artificially priced, thereby making the IRC system implemented since 2016 more dynamic and effective,” he said. 

This may also lead to a more effective and transparent transmission of monetary policy rates coursed through banks and financial markets. — Keisha B. Ta-asan

#BSP #shifts #variable #rate #repo #auction