(Bloomberg) — Emerging Asia’s worst-performing sovereign bonds are at risk of further declines as the Philippine central bank looks to delay monetary easing due to inflation fears and a weak peso.
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The Bangko Sentral ng Pilipinas has said interest-rate cuts may be pushed back, given higher consumer prices and the Federal Reserve’s less-dovish pivot. The BSP has had to contend with the country’s history of intense price pressures, and Barclays Bank Plc calls it the region’s most “inflation-sensitive” central bank.
With investors pricing in hawkish expectations, the country’s 10-year bond yields jumped by 73 basis points so far in April, the most in emerging Asia. That’s also close to double the 37 basis-point jump in similar-dated Indonesia yields.
Inflation has steadily risen in the Southeast Asian nation this year, and is expected to pickup pace in the coming months, bucking the disinflationary trend that some of its peers have experienced. The BSP raised its inflation forecast earlier this month, saying price growth will likely remain above the 2%-4% target through the third quarter. This indicates that the rise in yields may not let up.
Yields have risen due higher oil prices, the peso’s fall that “could lead to higher import prices, and higher-for-longer signals” from the Federal Reserve and BSP, said Michael Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila. He noted oil prices have eased in recent days.
Previous rate-hike cycles show how sensitive the BSP is to surging inflation. In five earlier tightening cycles going back to 2008, the correlation between a rate hike in a given month relative to CPI data three months before was as high as 0.99, according to analysis by Bloomberg. A correlation of one means both entries move in tandem.
“Inflation is the number one priority for the most inflation-sensitive central bank in the region,” according to an April 19 note by Barclays economists including Brian Tan.
The risk of an inflation upsurge or currency depreciation pressures aren’t unique to the Philippines. In March, Taiwanese policymakers shocked the market by hiking 12.5 basis points to combat inflation, while Bank Indonesia similarly surprised by raising by 25 basis points Wednesday.
Philippine Finance Secretary Ralph Recto also cautioned in an April 19 Bloomberg interview that his nation may see a delay in interest-rate cuts should the peso weaken past the record low of 59 per dollar. The peso closed on Wednesday at 57.55 per dollar.
“We’ve had a relatively stable currency,” he said. If the currency hits 59, “that would affect our ability to reduce interest rate going forward, I suppose.”
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