Pressure rising for BSP to soon raise key rates

A combination of higher global inflation seen spilling over locally through expensive oil plus the US Federal Reserve’s forthcoming rate hikes may force the Bangko Sentral ng Pilipinas (BSP) to aggressively jack up key interest rates this year.

“We expect headline inflation to rise, exceeding the BSP’s inflation target band of 2 to 4 percent by the second quarter, driven by a higher energy contribution (fuel and utilities), as well as higher core inflation as the economy reopens. We expect the BSP to start tightening monetary policy in the second half of the year, with a 25-basis point (bp) hike each in the third and fourth quarters of 2022,” Goldman Sachs Economics Research said in a March 4 report.

Raised forecast

Prior to the Ukraine-Russia war, investment banking giant Goldman Sachs projected a single 25-bp rate increase by the BSP in the fourth quarter. But as global oil prices skyrocketed amid the conflict, Goldman Sachs raised its 2022 inflation forecast for the Philippines to 4 percent—the top end of the BSP’s target range deemed manageable and conducive to economic growth—from 3.2 percent previously.

While headline inflation was steady at 3 percent year-on-year in February, Goldman Sachs pointed to last week’s statement of BSP Governor Benjamin Diokno, who acknowledged that the near-term rate of increase in prices of basic commodities would accelerate and be driven by elevated oil costs. Diokno had nonetheless assured the public that the BSP “continues to have a wide arsenal of policy instruments to respond to possible adverse impact of this external shock,” Goldman Sachs noted.

Singapore-based United Overseas Bank (UOB), meanwhile, was sticking with its forecast of a total of 75 bps of BSP rate hikes this year, from the current record-low 2 percent policy rate

“Near-term upside risks to Philippine inflation have risen after a full-scale Russian invasion of Ukraine sent global commodity prices higher and sparked fears of supply shortages. Further escalation in Russia-Ukraine tensions could push international commodity prices, particularly crude oil, much higher and, in turn, lift inflationary pressures in the Philippines as the country is a net importer of petroleum products and some food items,” UOB said in a March 4 report.

Citing the BSP’s own estimates, UOB noted that headline inflation may breach the target band if oil prices exceed $110 per barrel. As of Friday, Brent crude oil already cost $112.07 a barrel.

While UOB kept its 2022 inflation forecast for the Philippines at a within-target 3.5 percent, it said that “the new headwind brought on by Russia-Ukraine tensions will likely put the BSP in a cautious mode at the upcoming monetary policy meeting on March 24 as it weighs the upside risks to inflation against downside risks to the domestic growth recovery.”

UOB nonetheless expects the BSP to keep interest rates steady during this month’s meeting on the monetary policy stance.

“The path of US Federal Reserve monetary policy will also be a driving factor as rate differentials tighten. We project the overnight reverse repurchase rate to be raised to 2.75 percent by end-2022, with the first rate hike in the second quarter of 2022,” UOB said.

On the flip side, both UK-based think tanks Capital Economics and Pantheon Macroeconomics last week stood pat on their similar forecasts that the BSP will refrain from any rate hike in 2022.

Capital Economics senior Asia economist Gareth Leather and Asia economist Alex Holmes said in a March 4 report that February’s steady inflation “should reassure the [BSP] that it can continue to keep policy loose to support the recovery.”

“Overall, the stable headline is reassuring, highlighting that global oil prices aren’t rising fast enough — yet — to pose material and sustained upward pressure on inflation. No fuel price cap is in place in the Philippines, unlike in Thailand, though pump prices in the former historically operate with a slightly longer lag to changes in energy prices internationally. Nevertheless, the ongoing spike in oil prices and the recent rise in the futures curve, for now, suggest at most that oil-related disinflation this year will progress a lot more gradually than initially expected. Our full-year average inflation forecast of 2.8 percent remains appropriate,” Pantheon Macroeconomics senior Asia economist Miguel Chanco said in a March 4 report.