BSP seen poised to hike rates anew

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

The Monetary Board (MB) is widely expected to again raise the Bangko Sentral ng Pilipinas’ (BSP) policy rate at the Aug. 18 meeting, this time by 0.5 percentage point (ppt) to 3.75 percent, with the peak of inflation not yet seen.

Economic think tanks also expect the BSP to continue raising its overnight borrowing rate later this year by at least 0.25 ppt.

Moody’s Analytics said the BSP is dealing with significant pressures on inflation, which showed no sign of letting up, having risen for the fifth month in a row to reach 6.4 percent in July.

This was the highest monthly inflation reading since October 2018 or close to four years ago but could soon cool.

“With commodity prices and supply-chain stress easing, inflation is likely near its peak,” said Adam Kamins, Analytics director of Moody’s.

Kamins noted that gross domestic product (GDP) growth for the second quarter was below expectations at 7.4 percent year-over-year and contracted from the previous quarter.

October peak

ING Bank senior Philippines economist Nicholas Mapa said it expects inflation to peak in October.

Mapa said the BSP was likely to keep its hawkish leaning with Felipe Medalla at the helm, to bring the policy rate to 4.5 percent at the end of this year, especially if the United States federal funds clock in at 3.75 percent.

This means an additional hike totaling at 0.75 ppt after a 0.5-ppt hike that ING Bank expects this week.

Currently, the BSP’s policy rate is at 3.25 percent and that of the US Federal Reserve at 2.25 percent to 2.5 percent.

Capital Economics said the BSP’s tightening cycle will be over by the end of this year, having done hikes totaling 1.25 ppt earlier this year—including an off-cycle 0.75-ppt increase in July.

“Recent hawkish comments from new BSP governor, Felipe Medalla, suggest that the [BSP] will hike again at its meeting on Thursday, and we have penciled in another 25-bp [or 0.25-ppt] hike,” Capital Economics said.

Slowing growth

Earlier, Medalla said the MB might go for a hike of 0.25 ppt or 0.5 ppt. After the July inflation data was released, he said the latest figures raised the possibility for a 0.5-ppt increase.

“We have further hikes penciled in for the BSP’s meetings in September and November, but we think the central bank’s tightening cycle will come to a finish by the end of the year as inflation starts to ease and growth slows,” the company said.

Capital Economics predicts that decreasing fuel prices would ensure that inflation starts to fall sharply later this year.

United Overseas Bank said the latest data on inflation and GDP growth justify a continuation of policy rate hikes this month. UOB raised its forecast rate hike this month to 0.5 ppt from 0.25 ppt.

“We expect BSP to follow through with a 25bps hike in September before pausing in the November and December meetings, unless both global and domestic environments move in unexpected directions,” UOB said.

This will bring the BSP overnight rate back to the prepandemic level of 4 percent by the end of this year.

Goldman Sachs Economics Research also sees a 0.5-ppt hike this week given that inflationary pressure is likely to remain, with larger pressure on core inflation, the weak currency, and GDP growth was in line with BSP expectation.

“Going forward, we continue to expect BSP to deliver back-to-back 25-bp (0.25 ppt) hikes in September, November and December meetings, bringing the policy rate to 4.5 percent by the end of 2022,” Goldman Sachs said.

Robert Dan Roces, chief economist at Security Bank Corp., expects a hike of 0.5 ppt this week and 0.25 ppt in September, citing “the deeper-than-expected slowdown in second-quarter GDP.”

But Roces also expects a pause in policy rate hikes in the fourth quarter, to give way to the peak consumption and remittance season. INQ