Analysts split on BSP’s next rate move

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

Analysts are split on whether the Bangko Sentral ng Pilipinas (BSP) will raise interest rates more aggressively or continue to take small steady steps toward normalization when the Monetary Board meets on June 23.

The Netherlands-based ING Bank expects the BSP’s overnight borrowing rate to climb 50 basis points to 2.75 percent, following an initial 25-bp hike in May.

Before that, the BSP’s key policy rate lingered at a record low of 2 percent since November 2020.

ING Bank said its own survey of analysts showed that the consensus was also for a 50-bps increase this week.

The bank sees pressure mounting on the BSP to hike rates aggressively, considering that inflation moved well past its target of 2 to 4 percent, reaching 5.4 percent in May.

Aside from that, a weakening Philippine peso “will only translate to more inflation down the line,” ING Bank said.

Beleaguered currency

“Diokno signaled a 25-bp increase [this] week but we think the beleaguered currency and accelerating inflation will be enough to force a more punchy 50-bp rate hike from BSP,” it added.

Security Bank Corp. agreed, with their chief economist Robert Dan Roces saying that such expectations from the BSP were hinged on the larger size of the United States Federal Reserve’s rate hikes as well as rising inflation expectations in the Philippines.

The US Fed on June 15 raised the US federal funds rate by 75 basis points—the biggest increment since 1994—following two hikes of 50 bps each.

“The midpoint of the target range for the [US] fed funds rate would go to 3.4 percent, according to [a US Fed] forecast following its 75-bps [hike],” Roces said.

“Meanwhile, Philippine inflation is expected to average 4.5 percent with scope to go higher on emerging risks from food and volatility from oil prices,” he added.

Significant headwinds

Security Bank now believes that the BSP will raise its policy rate by a total of 150 bps, from 100 bps previously, to bring it to 3.5 percent by the end of this year.

This means four 25-bp hikes in the remainder of this year following the 50-bp increase penciled in for this week.

“The [Philippine] economy has the capacity to absorb slightly higher interest rates, especially now that demand is almost back to prepandemic levels,” Roces said.

“Inflation and the currency’s weakness are significant headwinds to further recovery and as such the central bank may need to act forcefully this June,” he said.

Meanwhile, GoldmanSachs is sticking to its prediction that the BPS will raise the policy rate by only 25 bps each time until it reaches 4 percent in the first quarter of 2022.

GoldmanSachs is banking on a hint from Diokno that the rate hike on May was “a start to a gradual tightening cycle given there are signs of a second-round impact on inflation starting to build,” referring to increases in wages and transport costs.

“Despite higher headline inflation in May, we note that inflation excluding food, utilities and transportation remains within BSP target band … giving BSP some room to deliver a gradual tightening in policy amid the ongoing economic recovery,” it added. INQ