BSP seen doubling its key rate over the next 10 months
After 18 months or 11 policy meetings without budging from a historic low of 2 percent, the key interest rate of the Bangko Sentral ng Pilipinas (BSP) is expected to rise rapidly starting May, and end up doubling to 4 percent by March 2023.
New York-based investment banking firm GoldmanSachs said in a commentary this scenario was likely considering that inflation hit 4.9 percent year-on-year in April, breaching the government’s target band of 2 percent to 4 percent for the first time since registering at 4.2 percent in September 2021.
Still, BSP Governor Benjamin Diokno said on Thursday the headline number for April was within the central bank’s forecast range for the month, 4.2 percent to 5 percent.
“The inflation outturn is consistent with the BSP’s assessment that inflation will remain elevated over the near term due to the continued volatility in global oil and nonoil prices, reflecting largely the continued impact of the conflict in Ukraine on the global commodities market,” Diokno said.
In a separate commentary, The Netherlands-based ING Bank said faster inflation was expected to persist for at least the rest of the year.
GoldmanSachs believes inflation was likely to stay above the target band until the second quarter of 2023, considering expectations that the Philippine economy would continue to rev up.
However, Diokno said inflation could settle above the government’s target range in 2022, before decelerating back to target in 2023 as supply-side pressures ease.
“While there are signs that inflation expectation is higher for 2022, it remains broadly anchored to the target in 2023,” Diokno reiterated.
Earlier this month, Diokno said the BSP might consider raising its overnight borrowing rate in their policy meeting in June, if Philippine gross domestic product grew by 6 percent to 7 percent in the first quarter.
Before that, the BSP chief held on to the position that tightening would not start until the second semester this year, despite the hawkish trend among influential central banks like the United States Federal Reserve.
Also on Thursday, the US Fed again raised the target range for the federal fund rate, this time by 50 basis points (bps), following a 25-basis point uptick in their previous policy meeting.
According to the US Fed, 50-bps hikes are on the table for at least each of their next two meetings.
ING Bank senior Philippine economist Nicholas Mapa said that considering the inflation outlook, the BSP is expected “to join the rate hike club” with a rate hike as early as their May 19 meeting.
GoldmanSachs agrees, but adds that the BSP will make the same move in each of the six remaining policy meetings this year for a total of 150 bps to end the year with a 3.5-percent overnight borrowing rate.
GoldmanSachs also believes that the BSP is up for 50 bps of hikes next year, particularly 25 basis points in each of two policy meetings at the beginning of 2023.
“This would take the terminal policy rate to 4 percent by the first quarter of 2023,” GoldmanSachs said.
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