Rate hike pause seen likely in November

MANILA  -There’s a good chance that the Bangko Sentral ng Pilipinas (BSP) is done with its tightening moves this year following the off-cycle hike last week, as upcoming data would likely show the limits of the central bank’s power to tame stubbornly high inflation, analysts said.

In an emailed commentary, Miguel Chanco, economist at Pantheon Macroeconomics, said the BSP made a “rash move” when it hiked its policy rate by 25 basis points to 6.5 percent in an off-cycle meeting last week, adding that another increase would be unlikely at the Monetary Board’s (MB) Nov. 16 meeting.

“To be clear, we still think that the meetings next month (November) and in December will see no rate action, as the next few key releases should quell the BSP’s hawkish inclination,” Chanco said, referring to the release of official data for October inflation and third-quarter gross domestic product.

“Taking into consideration the data so far, it looks like the economy managed to avoid a technical recession, but the slowdown in growth likely persisted,” he added. “We continue to believe that a return to target-range inflation by year-end is possible.”

READ:  Price inflation still way off 2023 target

Emerging data

Governor Eli Remolona Jr. last week said a 25-basis point hike would be “more likely” should the BSP decide to lift its key rate anew at its November meeting. But he added that any decision, including a possible tightening pause, would depend on emerging data.

Justifying the out-of-schedule tightening last Thursday, Remolona said the MB “recognized the need for this urgent monetary action” to send a strong message to the market that the BSP is doing everything to tame inflation as supply-side problems persist.

READ: BSP delivers off-cycle rate hike as price pressures build up

This, as the BSP might miss its 2- to 4-percent annual inflation target this year and next, the central bank boss admitted. Inflation might go down in the coming months and may even return to target “briefly,” he explained, but “not as much as we used to expect.”

Supply-side factors

Nicholas Mapa, senior economist at ING Bank in Manila, agreed with Chanco that the BSP could possibly slam the brakes on rate hikes this month.

“The BSP has at its disposal monetary tools and thus has no ability to fend off price pressures from supply-side factors. In a sense, the BSP lacks the precision strike capability on inflation and must do so indirectly by slowing capital formation which would have a knock-on effect on growth,” Mapa said.

“So even if BSP is carrying out rate hikes to fend off second round effects and to corral inflation expectations, it will always be on the back of slowing down growth first,” he added. INQ