BSP tipped to hike rate by final 25 bps

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may cap its tightening cycle with one more rate hike to help weather volatility stemming from a hawkish US Federal Reserve (Fed).

In a note to clients, economists at Australia and New Zealand Banking Group Ltd. (ANZ) said such a response is needed as the Philippines—much like Indonesia—remains vulnerable to external pressures because of its persistent trade deficit that continues to drive dollar outflows.

READ: BSP warned vs premature monetary easing

The BSP may deliver its next quarter-point rate increase “in the coming quarters,” ANZ said, adding that bringing inflation back to target would remain the central factor in its the decision.

“While most central banks have delivered the tightening we expected earlier in the year, risks remain skewed towards further tightening,” the bank said. “Even in Indonesia, and the Philippines, inflation and external risks continue to constrain the policy outlook despite a higher hurdle to hike.”

Since April, the BSP has raised its key rate by 75 basis points (bps) to 5 percent, after the Middle East conflict pushed up global oil prices and sent domestic inflation above the central bank’s 3-percent target.

The latest increase came in August, when the central bank described the move as a “preemptive” step against emerging risks from a severe El Niño episode and possible wage increases.

Balancing act

That leaves policymakers with a delicate balancing act: containing inflation without further weighing on an economy that grew just 2.6 percent in the first half of the year.

READ: BSP raises policy rate to 5%; peso sinks to new low

The BSP must also contend with a weakening peso, which could add to imported inflation and complicate its next policy decision. Ahead of the Fed’s decision to raise rates last week, the local currency came under renewed pressure, weakening toward the P63-per-dollar level.

In a separate note, William Jackson, chief emerging markets economist at London-based Capital Economics, said there’s less urgency for central banks like the BSP to match the Fed’s moves.

“Taken together with past monetary tightening, real interest rates are now high, relative to estimates of the neutral interest rate and relative to their past levels,” Jackson said. “That also reduces pressure on central banks to raise policy rates.” INQ