One more rate hike seen

Economists expect one more rate hike by the Bangko Sentral ng Pilipinas before the end of the year even as they see inflation easing in the coming months.

“In the Philippines, with growth easing and inflation likely to start falling soon, we are expecting just one more 25 basis point hike this year, most likely at the BSP’s next meeting in September,” Capital Economics senior Asia economist Gareth Leather and Asia economist Krystal Tan said in an Aug. 10 research note titled “Asia tightening cycle to lose some steam.”

Philippine economic growth slowed to 6 percent in the second quarter, the lowest rate in three years, due to high inflation as well as tighter environmental, mining and aquaculture regulations.
Amid elevated inflation, the BSP raised the policy rate to 4 percent or by 50 bps on Thursday, “its most aggressive hike in a decade,” London-based Capital Economics noted.

With the last tightening, the BSP had already raised interest rates by a total of 100 bps this year.

A further hike in cigarette excise tax coupled with the increase in jeepney fare last month pushed headline inflation to a new over five-year high of 5.7 percent in July, bringing the seven-month average to 4.5 percent, above the government’s full-year target range of 2-4 percent.
Separately, UK-based Oxford Economics said in a research note titled “BSP—100 bps and counting” that it was expecting the rate of price increases in basic goods and services “to average well above the BSP’s target this year and close to 4 percent in 2019.”

The government’s inflation target for 2019 is 2-4 percent.

“While over the next year, oil prices leveling out and a less positive output gap should ease some of the pressure on the headline rate, the risks remain to the upside (something highlighted by the BSP as well). Accordingly, we expect the central bank to hike again in December and twice more next year,” Oxford Economics’ head of Southeast Asia economics Priyanka Kishore and senior economist Beatrice Tanjangco said.

Given than “inflation concerns are biting in the Philippines,” Oxford Economics said “the BSP’s decision to hike interest rates by a cumulative 100 bps within three months clearly signals its intent to bring inflation back within the official 2-4 percent target range.”

“However, with inflationary pressures broadening and upside risks manifesting themselves in elevated inflation expectations, this will require continued vigilance from the central bank,” Oxford Economics said.