BSP seen poised to rev up rate hikes on inflation woes

Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)

Accelerating inflation plus the aggressive monetary tightening stance of major central banks are seen pushing the Bangko Sentral ng Pilipinas (BSP) to soon increase its key rate by increments of more than 25 basis points (bps), according to ING Bank.

ING Bank senior Philippines economist Nicholas Mapa said in a commentary the BSP may need to tighten aggressively, with the economy fully on the mend and inflation surging to multiyear highs. After keeping the BSP’s key policy rate—its overnight borrowing interest rate—at a record low of 2 percent since November 2020, the Monetary Board raised it by 25 bps to 2.25 percent in May.

“The name of the game is to get ahead of the curve, restore confidence in the BSP and bring back policy rates back to ‘normal’ before inflation eats away much of the recent economic recovery,” Mapa said.

Inflation reached 5.4 percent in May, the fastest rise in prices of basic goods in three and a half years or since the 6.1 percent recorded in November 2018.

The BSP’s goal is to shepherd average inflation to within 2 percent and 4 percent in 2022, the same target band as last year.

Supply constraints

In 2021, inflation averaged at 4.5 percent, mainly driven by constraints on the supply of key food items along with rising energy prices—the same factors that are putting upward pressure on inflation this year.

Mapa said inflation was likely to again breach the upper end of the BSP’s target, for a second year in a row.

“Unlike the most recent episode of skyrocketing pump prices, domestic demand appears to have taken red hot inflation on the chin and carried on, for now,” he said.

Considering this, and the Philippine economy has regained prepandemic levels with four straight quarters of expansion so far, the economist said there appeared to be little impetus to provide “uber stimulus,” especially as the BSP’s price stability mandate has been breached.

The economist was referring to the record-low rates, an “ultra-accommodative” stance that the BSP pursued throughout most of the pandemic, in an effort to help nurse the ailing economy back to health.

“We now expect BSP to commit to getting ahead of the curve to allay fears of runaway inflation with up to 125 bps worth of rate hikes from BSP in the coming months,” he said.

US Fed action

Mapa said stubbornly high inflation, coupled with prevailing signs that influential central banks like the US Federal Reserve are primed to hike rates in a hurry, should convince the BSP that the time of gradual and measured pedestrian 25 bps rate hikes is likely over.

Analysts expect the US Fed to raise the US federal fund rates by as much as 75 bps in their policy meeting on June 14 to June 15, following a 50-bps hike last month. INQ