Another 50-bp BSP rate hike seen in August

The Bangko Sentral ng Pilipinas (BSP) may raise its key policy rate again in August, by 50 basis points to 3.75 percent and possibly further in the remainder of the year with inflation remaining high and the peso continuing to sink against the US dollar, analysts said.

“As the economy continues to recover, with rising inflation expectations and a hawkish Monetary Board, we now expect the BSP to deliver a 50-bp hike in August and consecutive 25-bp hikes from September onwards, bringing the policy rate to a terminal rate of 4.5 percent at the end of 2022,” Goldman Sachs said in a commentary.

Before the BSP’s off-cycle 75-bp increase in its overnight borrowing rate on July 14, Goldman Sachs had expected the benchmark interest rate to reach just 4 percent in the first quarter of 2023.

Oxford Economics, however, is sticking to its recent call for just one more hike this year—50 bps in August that will bring the BSP key policy rate to 3.75 percent.

“But if the [peso] were to depreciate sharply from here or inflation surprised on the upside, this would justify further tightening this year,” Oxford Economics said.

“For now, we expect that with global trade set to slow and a negative output gap, the BSP will be conscious to not stifle the recovery in domestic demand,” it added.

A negative output gap occurs when actual output is less than what an economy could produce if running at full capacity.

‘Stubbornly high’ inflation

ING Bank said that with the inflation rate hitting 6.1 percent in June and was expected to sustain its climb, the BSP would need to sustain an aggressive tightening drive to anchor inflation expectations back to the target range of 2 to 4 percent.

“We expect the BSP to hike again at least one more time in the third quarter with the possibility of further tightening should inflation continue to remain stubbornly high,” ING Bank said.

The bank added that the peso would get an immediate reprieve in the short term but chronic trade deficits could mean that any rally in the currency may be limited.

Peso on freefall

On July 15, the local currency was trading near its all-time weakest position against the US dollar at 56.45:$1.

DBS said a 50-bp hike in August “is in play,” considering that the BSP still had room to normalize and tighten policy at a fast pace to return to the pre-pandemic level of 4 percent.

“The likelihood of the policy rate reaching 4.5 percent by end-2022 is decent, especially if high inflation remains sticky above the BSP’s 2 to 4 percent target range,” the Singaporean bank said.

But for Pantheon Macroeconomics, which earlier predicted that there would be no more BSP rate hike after the 25-bp increase in June, said this week’s off-cycle rate hike was “overkill.”

“We disagree fundamentally with the [Monetary Board’s] assessment that a ‘significant further tightening of monetary policy was warranted by signs of sustained and broadening price pressures,” Pantheon Macroeconomics said.

The research firm believes that inflation in the Philippines will peak soon, with oil prices dipping soon to dampen the increase in prices of other commodities.