BSP seen jacking up rates by 0.5 ppt

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

The Monetary Board (MB) is widely expected to raise the Bangko Sentral ng Pilipinas (BSP) policy rate again by 0.5 percentage point (ppt) to 4.25 percent considering that inflation in the Philippines remained high and could remain so amid rising interest rates abroad.

The rate of increase in commodity prices was pegged at 6.3 percent in August, slightly lower than 6.4 percent in July, but still way past the upper end of the government’s target range of 2 to 4 percent.

“The central bank will likely retain its hawkish tone and signal additional rate hikes for the rest of the year with inflation still expected to breach the BSP’s inflation target for the year,” The Netherlands-based ING Bank said in a commentary.

New York-based GoldmanSachs thinks similarly, even while noting that BSP Governor Felipe Medalla has emphasized that the BSP “cannot not react to what the [United States Federal Reserve] is doing” amid ongoing foreign exchange market pressures.

The BSP policy meeting is scheduled on Sept. 22 and that of the US Fed on Sept. 20 to Sept. 21.

The American investment bank said that the US Fed might raise this week the federal fund rate by 0.75 ppt. Considering this, it has raised its forecast peak for this US benchmark by 0.5 ppt to a range of 4 to 4.25 percent.

New expectations

“We are revising our expectation for the BSP policy rate decision and now expect the central bank to hike policy rates by [0.5 ppt] at its meeting [this] week, from [0.25 ppt] earlier,” GoldmanSachs said.

“We now expect the BSP to continue to hike policy rates in [0.5 ppt] increments at the next two meetings, before slowing to a [0.25 ppt] pace in December, and then stopping,” it added.

This means the BSP’s overnight borrowing rate could peak at 5 percent by the end of this year, which is 0.5 ppt higher than the previous forecast by GoldmanSachs.

Robert Dan Roces, chief economist Security Bank Corp., also expects a 0.5-ppt hike with inflation and the peso’s weakness remaining the key consideration.

“Growth momentum [of the Philippine economy], though slowing, remains strong and as such will be able to absorb the hike,” Roces said. “This move will also put a premium over the expected [0.75 ppt] hike by the US Fed before the MB meeting.”

Security Bank also expects another 0.25 ppt hike in the MB’s November meeting before giving way to this year’s peak consumption and remittance season.

Think tank

Meanwhile, United Kingdom-based Oxford Economics sees only a 0.25-ppt hike this week, which will be the last one for BSP until the end of 2013.

BSP policy rate, now at 3.75 percent, to peak at 4 percent; the UK-based think tank believes that the BSP will raise by only 0.25 percent more until the end of 2023.

Oxford Economics believes that central banks in the Asia-Pacific region, including BSP, will prioritize anchoring their markets’ inflation expectations to regulators’ targets instead of following the moves of the US Fed.

“We expect a limited increase in policy rates across Asia, and most central banks are unlikely to match the Fed’s likely aggressive tightening,” the think tank said.

“While the near-term imperative is to keep inflationary expectations anchored, the medium-term goal is to promote growth as there is still significant slack in most Asian economies,” it added. INQ