BSP to do ‘hawkish pause’ on interest rate increases on Thursday — analyst
MANILA, Philippines — The Philippines’ inflation fighters will likely do a “hawkish pause” on policy tightening at their next rate-setting meeting, as they face a tough balancing act of reining in soaring prices without hurting the economy.
Inflation clocked in at 6.7 percent in October, unchanged from September’s clip but still the fastest pace in nearly a decade. Year-to-date, inflation averaged 5.1 percent, well above the government’s 2-4 percent target band.
In a bid to temper consumer demand that likely lifted prices, the Bangko Sentral ng Pilipinas has responded by delivering back-to-back interest rate hikes of 1.5 percentage points since May, its most forceful action against inflation since 2000.
In a commentary dated November 12, Nicholas Mapa, senior economist at ING Bank in Manila, said the central bank is expected to leave benchmark rates unchanged at their November 15 meeting as inflation is expected to return to target even without monetary policy actions.
But Mapa said the BSP would likely strike a hawkish tone to anchor inflation expectations.
“Despite the pause, we see BSP retaining its hawkish stance to indicate that it remains vigilant against any build-up in price pressures and that it stands ready to act if necessary,” he said.
“The ‘hawkish pause’ would have a positive offshoot in that it affords the real economy some breathing room, limiting the likelihood that growth would slow substantially as the Philippines looks to maintain its above-6 percent growth trajectory,” he added.
'Down to the wire'
Raising interest rates discourage people from borrowing money and from spending, causing a decline in demand which, in turn, tempers inflation. This also makes securing bank credit for business expansion plans more expensive.
In the third quarter, the Philippine economy slowed down to a three-year low of 6.1 percent, as higher borrowing costs and red-hot inflation weigh on consumer spending, which has traditionally been the driving force behind growth.
In the July-September period, household consumption grew 5.2 percent, its lowest level in four years, from 5.9 percent in the second quarter. Meanwhile, government spending and investments were up by 14.3 percent and 21.5 percent, respectively, helping offset the weaker punch from household expenditure.
Socioeconomic Planning Secretary Ernesto Pernia said the Philippines would have expanded by 6.5-7 percent last quarter had soaring prices been controlled, adding that the state’s downwardly revised 6.5-6.9 percent goal for this year is now “much more challenging” to hit.
Market watchers are divided between a pause and a modest hike on Thursday. BSP Deputy Governor Chuchi Fonacier has reportedly said there’s a “possibility” that monetary authorities will hit the brakes on rate hikes, or ease foot off the accelerator and mildly jack up lending rates by 25bps.
“If the BSP chooses to hike rates to assure its inflation path, it could run the risk of sapping even more momentum from economic growth. This decision would champion price stability but run the risk of seeing its sterling growth print fade very quickly,” ING bank’s Mapa said.
“Meanwhile, a decision to pause to help ensure economic growth could expose the BSP to moderating price pressures and threaten its price stability objective,” he added.
“From here, it looks like Thursday’s decision will go down to the wire.”
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