BSP to cap any follow-up rate hike at 25 bps

A 25-basis point hike would be “more likely” should the Bangko Sentral ng Pilipinas (BSP) decide to lift its key rate anew at its November meeting, its governor said, adding that any decision, including a possible tightening pause, would depend on emerging data.

“If there’s a hike, more likely 25 than 50 but it depends on data —if there’s a hike,” BSP Governor Eli Remolona Jr. told reporters in an interview on Friday.

But Remolona explained that he is “not even sure” if a possible quarter-point increase on November 16 would be justified after the BSP hiked the policy rate by the same amount to 6.50 percent in an off-cycle decision this week.

That said, the BSP chief is also not ruling out a rate hike pause next month.

“There’s a good chance we won’t hike, there’s a good chance we’d pause, there’s a chance we might hike but 50 is a bit of a stretch,” he said.

Justifying the out-of-schedule tightening last Thursday, Remolona said the Monetary Board (MB) “recognized the need for this urgent monetary action” to send a strong message to the market that the BSP is doing everything to bring inflation back to its 2 to 4 percent target.

That’s because inflation expectations have risen based on data, Remolona said, meaning the BSP has to convince the public that it can tame inflation or else workers anticipating higher prices in the coming months might ask for bigger wages, which could result in a dangerous cycle of high inflation as businesses would likely increase their selling prices to cover the costs of salary hikes.

According to Remolona, the BSP might miss its 2 to 4 percent annual inflation target this year and next. Inflation might go down in the coming months and may even return to target “briefly”, he said, but “not as much as we used to expect”.
“So the whole path is elevated,” he said.

Tight credit standards

Banks use the BSP’s benchmark rate as a guide when charging interest rates on loans. By making borrowing costs more expensive, the BSP wants to temper strong demand for commodities with limited supply, thereby controlling inflation.

Results of a BSP survey of senior bank loan officers released Friday showed 80.9 percent of banks polled maintained their tight credit standards for businesses in the third quarter, and would likely keep it as it is in the fourth quarter.

This, amid expectations of a deterioration in borrowers’ profiles, decline in the profitability of banks’ portfolios, and lenders’ reduced tolerance for risk, the BSP said.

But the same survey found 72.3 percent of respondent banks indicated a “steady overall loan demand” from firms in the third quarter, with a bigger appetite for credit expected from enterprises this quarter due to “customers’ improved economic prospects as well as increased inventory and accounts receivable financing needs.”

Meanwhile, 68.8 percent of banks surveyed said they maintained their credit standards for loans to households in the third quarter, citing “steady economic outlook, sustained profitability of banks’ portfolios, unchanged risk tolerance, and steady profile of borrowers.” For this quarter, the BSP reported banks’ expectations of a net easing in household credit standards.

At the same time, lenders anticipate an increase in loan demand from households in the final three months of the year on the back of higher household consumption and housing investment, as well as banks’ more attractive financing terms amid a “limited availability” of other sources of funds.