Up to 50-basis point rise in interest rates seen

The Bangko Sentral ng Pilipinas is widely seen to hike its key interest rates to curb higher-than-expected inflation in its next monetary setting on Aug. 9.

Many say it’s now just a question of whether it will deliver the usual 25-basis point increase or will go for a more aggressive 50-basis point hike.

With year-on-year inflation rate hitting a five-year high of 5.2 percent in June, British banking giant HSBC said a “more forceful” response from the inflation-targeting Philippine central bank may be expected as the “June stock” had broad implications.

“We expect a 50-bp (basis point) rate hike at its next policy meeting (presumably in August) in recognition that inflation is now significantly higher than initially expected and to show the central bank’s resolve to curtail it as soon as possible,” HSBC said in a research note dated July 17.

“We see a 25-bp hike as largely priced in, while a 50-bp rate hike would be seen as more preemptive as it takes into account that inflation will be higher over the near term and be above target for longer than expected—not merely as a reaction to higher-than-expected prices in June,” the research said.

HSBC now sees inflation peaking at about 5.5 percent, while core inflation is seen to hover above 4 percent all the way to the first quarter of 2019.

“Moreover, another inflation shock cannot be completely ruled out as the June print likely further heightens inflation expectations and may lead to another round of broad-based price increases. It also largely minimizes the effects of inflation mitigating measures (such as rice tariffication) over the near term,” the research said.

Standard Chartered Bank said the BSP might raise its overnight borrowing rate for a third consecutive time this year from 3.5 percent to 3.75 percent on Aug. 9 and pause thereafter.

“We expect the BSP to pause after its August meeting, in September, to evaluate the impact of three successive rate hikes. Inflation is likely to slow (albeit remaining elevated) in fourth quarter, reducing pressure on BSP to hike further,” Stanchart said in a July 13 research note.

Stanchart expects Philippine inflation to edge up further in the third quarter, likely peaking at 5.8 percent in August and remaining high through 2018 and 2019.

“We continue to believe the increase in inflation, partly due to VAT (value added tax) hikes, is stickier than BSP’s forecasts. The VAT hike on fuel has only just been transmitted to transport prices, as seen in the recent pickup in transport inflation. We expected the second-round impact only in second half 2018, as we forecast higher transport prices pushing up supply chain costs to be a longer process. This process is likely to continue in third quarter, keeping transport prices high,” Stanchart said.

Transport contracts in the supply chain industry are typically fixed semiannually, which means higher fuel costs are transferred to the supply chain with a lag of about six months, the British bank said.

“Food inflation is also likely to remain high on high rice and fish prices, despite government efforts to reduce supply-side pressures. Risks to inflation are to the upside on higher oil prices and a weaker currency, in our view,” the research said.

While rice inflation has garnered more market attention as a key driver of food inflation, given its historically important role as a main staple, Stanchart said it was fish that had been the bigger driver of inflation, despite its smaller weight in the inflation basket.

“We expect fish inflation to remain high, and possibly rise further in the third quarter typhoon season. This is likely to keep food inflation—which moderated mildly in May—elevated, maintaining upside pressure on headline inflation,” it said.