Odds of more hefty BSP rate hikes rising on stubborn inflation

BSP facade logo closeup

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

Expectations that the Bangko Sentral ng Pilipinas (BSP) will continue to increase its key rates, especially with another large hike of 0.5 percentage point this month, are bolstered with inflation rising for the fifth month in a row and reaching 6.4 percent in July.

BSP Governor Felipe Medalla said high inflation, having risen even further in July, “raises the possibility” that the Monetary Board (MB) might vote for a 0.5 ppt increase instead of 0.25 ppt.

Entertaining questions at a forum hosted by the Federation of Filipino-Chinese Chambers of Commerce and Industry on Aug. 5, Medalla reiterated that the BSP was ready to take steps to shepherd inflation back toward the government’s target range of 2 to 4 percent.

Medalla, who is also MB chair, said last month the MB’s possible move at its August meeting would be an increase in the BSP’s overnight borrowing rate by either 0.25 ppt or 0.5 ppt.

This would follow the surprise, off-cycle 0.75-ppt rate hike announced on July 14, which was itself prompted by an outlook that the rate of growth in prices of basic goods and services was going faster still. Inflation had been rising month after month since 3 percent last February.

The United Kingdom-based Pantheon Macroeconomics, which had predicted that the BSP will not raise rates anymore this year after the July 14 hike, now says that the “door (is) ajar for yet another BSP rate hike later this month.”

Pantheon Macroeconomics said the main surprise in the July data was the continued uptick in transport inflation, despite the month-on-month drop in fuel prices at the pump.

The company added that the recent decrease in fuel prices should at least be picked up in the August inflation report, resulting in the beginning of a “sustained U-turn” of the year-on-year rate.

“The punchier-than-expected print [or inflation result] for July leaves the door open for yet another BSP rate hike this month, despite the Monetary Board’s huge out-of-cycle adjustment last month,” said Miguel Chanco, chief economist on emerging Asian markets at Pantheon Macroeconomics.

“For now, though, we’re keeping to our view that [MB] members will be forced into a pause at their next meeting in late August, if we’re right about the likely disappointment in the… Q2 GDP [second quarter gross domestic product] report, which we expect will show a surprise quarter-on-quarter contraction,” Chanco said.

Meanwhile, The Netherlands-based ING Bank sees improved prospects for economic growth which, along with the higher-than-target inflation, point to the BSP “staying hawkish for the rest of the year.” INQ