Amid recent rise in inflation, Philippine central bank not seen to tighten policy

Due to inflation's relation to supply side.

Because the recent rise in inflation can be blamed on temporary supply side factors, it is doubted that Philippine central bank BSP will move to tighten policy aggressively.

According to a research note from UBS, BSP Governor Tetangco’s comments following the release of the inflation data imply the central bank will watch for second round effects and attempt to guide inflation expectations.

Consistent with this, UBS continues to expect another 25bp increase in key policy rates (repo and SDA) by year end.

However, if inflation becomes less well behaved as we expect, these moves may prove to be too modest.

UBS assumes the BSP will be encouraged to move faster by financial markets in 2015 and look for 100bps of policy rate hikes in 2015 alongside a weaker peso in coming months.

The report noted that UBS continues to forecast end-2014 USDPHP at 46.

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