BSP seen raising rates by 50 basis points

The inflation-targeting Bangko Sentral ng Pilipinas (BSP) may raise interest rates twice more this year for a total of at least 50 basis points to temper fast-rising consumer prices, but beyond monetary tightening, broader measures to ease supply constraints are much needed, economists said.

“We still expect another 50 basis points of rate hikes this year, but BSP could do more given inflation and inflation expectations continue to rise,” Japanese investment house Nomura said in a recent research note.

There are upside risks to this outlook as higher headline inflation and further peso depreciation could stoke inflation expectations and prompt the BSP to increase again by a relatively aggressive 50 basis points this month and in November, Nomura said.

Nomura expects Philippine inflation to stay high at around 6 percent in September and October before gradually easing to 5.6 percent by yearend, prompting the BSP to adjust key interests by 25 basis points each during its monetary setting in September and November.

Assuming both oil and rice prices remain at current levels over the next few months, Nomura raised its 2018 Philippine inflation forecast to 5.1 percent from 4.9 percent.

In August, the country’s inflation rate picked up pace to a nine-year high of 6.4 percent from 5.7 percent in July, bringing the year-to-date average to 4.8 percent versus the BSP’s 2-4 percent target.

For British banking giant HSBC, the base case is for the BSP to raise by only 25 points this September, with the next 25-basis point hike in the fourth quarter seen more dependent on a broader set of measures such as continually high inflation, continued US Federal Reserve tightening and a stronger dollar.

But as inflationary pressures are still primarily coming from the supply side, with food and oil prices being the major contributors, HSBC said monetary tightening alone would not be enough to bring inflation down to target.

HSBC is referring to supply side constraints, particularly for the country’s main staple rice. Bad weather has also curbed supply of farm goods, exerting more pressure on food prices.

By 2019, HSBC expects further monetary tightening as the second tranche of excise tax increases take effect in January.

“These are likely to spur higher inflation expectations, and the fact that headline inflation is now likely to breach the BSP’s 2-4 percent target for the second consecutive year in 2019 means that the BSP must remain on guard for further monetary tightening,” HSBC said in its research note.

HSBC expects the BSP to react “more proactively” to the tax increases in January with another 25-basis point increase in first quarter 2019, taking the overnight borrowing rate to 4.75 percent.