Another 50-bps rate hike seen

The Bangko Sentral ng Pilipinas (BSP) may raise its key interest rates by another 50 basis points (bps) at its upcoming policy rate setting on Sept. 27, following the unexpected surge in the country’s annual inflation rate in August, economists said.

The year-on-year inflation rate of 6.4 percent in August exceeded the 5.5-6.2 percent projected range of the inflation-targeting BSP and was likewise much higher than the consensus forecast of 5.9 percent.  The inflation rate picked up pace from 5.7 percent in July.

“Inflation expectations remain on an uptrend and increases demand pull pressures as consumers and businesses anticipate elevated prices. The central bank needs to contain runaway inflation expectations and demand pull pressures. The chances of another aggressive monetary policy action has zoomed as inflation surged. Another 50 basis point policy rate hike at the Sept. 27 meeting is a real possibility,” ING Philippines economist Joey Cuyegkeng said in a research note on Wednesday.

In a separate research note, Japanese investment house Nomura said the higher-than-expected pickup in August headline inflation could “further stoke inflation expectations, raising the risk of BSP hiking again by a relatively aggressive 50 basis points this month, with possibly more to come.”

The Nomura research note, written by economists Euben Paracuelles and Charnon Boonnuch, said the drivers of inflation had broadened and appeared to have continued to do so last month.

“This would be seen by BSP as a sign of more second-round effects, thus warranting a monetary response,” the research said.

The pickup in core inflation was also seen in line with Nomura’s long-held view that strong domestic demand conditions were resulting in a stronger pass-through from supply-side effects, such as the impact of recent tax reforms and higher oil prices.

“In addition, contagion effects from other EMs (emerging markets) may also add to pressures on the currency, which we think was a key driver of the last 50-bp hike, with BSP citing further Philippine peso weakness having the potential to add to upside risks on inflation. All this strengthens the case for more rate hikes than we currently forecast,” the research said.

Prior to the release of the August inflation data, Nomura was expecting a rate hike of only 25 basis points this September and another 25 basis points in November.

For his part, Cuyegkeng expects inflation to remain high for the rest of the year with the September inflation rate likely to remain above 6 percent.

He sees the full-year average inflation at 5.1 percent, significantly higher than the BSP’s inflation target range of 2-4 percent.

The BSP has so far raised interest rates by a total of 100 basis points this year, the last of which was a 50-basis point hike in August that brought the overnight borrowing rate to 4 percent.