BSP seen raising interest rates again in August

The inflation-targeting Bangko Sentral ng Pilipinas (BSP) is seen to sanction a faster pace of interest rate increases this year after the unexpected spike in the country’s June inflation rate to a five-year high of 5.2 percent.

“Reining in inflation expectations, aside from stabilizing Philippine peso, may require a more aggressive central bank response,” Dutch financial giant ING said in a research note issued yesterday.

ING expects the BSP to raise anew its key interest rates at its next policy meeting in August by at least 25 basis points, with a caveat that a higher policy rate increase may even be possible.

In a separate research note, Japanese investment house Nomura said that after the back-to-back rate hikes in May and June, the BSP may hike interest rates again by 25 basis points at its next meeting in August, taking the policy rate to 3.75 percent.

The 5.2-percent year-on-year June headline inflation was significantly higher than the market consensus of 4.8 percent. It likewise overshot the BSP’s forecast range of 4.3-5.1 percent.

Nomura said risks to its 4.6-percent Philippine full-year inflation forecast might now be tilted more to the upside because of upcoming supply-side factors, such as the impending increases in power rates and the impact of a higher coal tax.

“We believe inflation expectations are also likely to rise further, as evident in rising demand for wage increases. As such, we also now see some risk that the BSP may deliver additional rate hikes this year, taking the policy rate above our 3.75 percent forecast,” Nomura said.

Even British banking giant HSBC—which previously had a neutral view on the BSP’s monetary policy moving forward—was now turning more hawkish.

In a research note, HSBC said the BSP might have to revise its inflation forecast for 2018 and 2019 in the coming weeks, quoting the BSP’s own statement that shepherding inflation back to the 2-4 percent target “may require further policy response in the short-term.”

“HSBC expects further tightening by the BSP only in 2019, due to our expectation for rice tariffication to put downward pressure on prices into year-end 2018. Note, however, that Philippine government officials now expect its passage by end-2018. Delayed passage risks stunting any disinflationary impact the measure may impart on inflation this year,” HSBC said.

According to ING, while full implementation of the government’s supply augmenting measures would moderate inflation, additional cost-push pressures are emerging. After three regional wage boards approved 4-5 percent increases in minimum wages, ING said another regional wage board might approve a 6-percent increase while the government has allowed a 12-percent increase in minimum transport fares for the country’s capital and two adjoining regions.

“Another price pressure is through the recovering oil price. Philippine peso weakness is another price pressure and it depreciated by 7 percent year-on-year in June. Demand pull price pressures from strong economic activity and income tax reform are likely to exacerbate the tight price environment,” it added.