More, yet smaller, BSP rate hikes expected

BSP Governor Felipe Medalla

Most economic think tanks see additional—but smaller—increases in the policy rate of the Bangko Sentral ng Pilipinas (BSP) in the coming months. But many expect the tightening cycle to pause after December, mainly as inflation is projected to peak in the fourth quarter.

Gareth Leather, senior economist on Asia at the United Kingdom-based Capital Economics, noted that the BSP gave a strong indication that more rate hikes are likely over the coming months.

Considering that and “with inflation set to peak soon and headwinds to the economic recovery mounting, we don’t think the tightening cycle will run much beyond the second half of this year,” Leather said.

New York-based GoldmanSachs believes that the central bank is now mainly focused on taming inflation rather than supporting economic recovery.

“Going forward, as the economy recovers, with elevated price pressures, rising inflation expectations and a heightened inflation focus by the monetary board, we continue to expect consecutive 25-basis-point [or 0.25-percentage point] hikes in September, November and December,” GoldmanSachs said.

Peak inflation

Such a series of increases— totaling at 0.75 ppt—would bring the BSP’s overnight borrowing rate to 4.5 percent by the end of this year.

Oxford Economics, which is also based in the United Kingdom, thinks there would be only one more rate hike in the remainder of this year and only at 0.25 ppt either in November or in December.

“Inflation is yet to reach its peak of around 7.7 percent in the fourth quarter, and we see the peso remaining weak in 2022 entering into 2023, keeping import prices elevated,” said Makoto Tsuchiya, assistant economist at Oxford Economics.

“As such, the BSP still has more work to do. But thereafter we expect the [cental bank] to take an extended pause,” Tsuchiya said.

‘Blind to reality’

On the other hand, Pantheon Macroeconomics—also based in the United Kingdom—said the BSP was “blind to reality, and its own forecasts.”

Miguel Chanco, chief economist on emerging Asia at Pantheon Macroeconomics, said the BSP’s fourth rate hike in as many months is “overkill,” especially coming after a 0.75-ppt off-cycle hike in July.

“Monetary policy is a forward-looking exercise, so it was more than strange that the [BSP] continued to tighten, while acknowledging at the same time that the medium-term outlook for inflation is now improving,” Chanco said.

On Thursday, BSP Governor Felipe Medalla said that while inflation expectations for 2022 shifted higher, projections for 2023 and 2024 went lower.

“Overall, we would be very surprised if the BSP tightens policy further from current levels, and we now can’t rule out the chances of a partial rollback of the 175-bp [1.75-ppt] in hikes next year, especially if we’re right about the economy’s likely continued underperformance,” Chanco said. INQ