BSP seen raising interest rates this week

MANILA, Philippines — More economists expect the interest rate liftoff by the Bangko Sentral ng Pilipinas (BSP) to kick off this week after the economy delivered a solid gross domestic product (GDP) growth performance in the first quarter.

ANZ Research chief economist Sanjay Mathur and economist Debalika Sarkar said policy normalization in the Philippines may start on May 19, with a possible rate hike of 25 basis points as the BSP takes into consideration the evolving growth-inflation dynamics.

“This will be followed by similar hikes in each of the five remaining meetings, taking the policy rate to 3.50 percent by yearend,’’ the economists said.

The Monetary Board has maintained an accommodative monetary policy stance by keeping interest rates at record lows since November 2020 to allow the economic recovery from the pandemic-induced recession to gain more traction.

The BSP slashed interest rates by 200 basis points in 2020, bringing the benchmark interest rates to an all-time low of two percent as part of the central bank’s COVID response measures.

“The first quarter GDP growth of 8.3 percent year-on-year was not only considerably stronger than the average growth rate of 7.4 percent year-on-year in the second half of 2021, but also surpassed its pre-pandemic level,” Mathur and Sarkar said.

With the improving business and consumer confidences amid increased mobility, ANZ said the BSP could now focus more on addressing the intensifying inflationary pressures as the consumer price index (CPI) quickened to 4.9 percent in April from four percent in March.

For his part, Citi Economist for the Philippines Nalin Chutchotitham said the probability of an earlier rate hike on May 19 has increased.

“Stronger domestic demand recovery may lead to greater pass-through of costs from businesses to consumers, while foreign exchange depreciation coupled with prolonged high commodity prices could add to BSP’s concerns,” Chutchotitham said.

For 2022, Chutchotitham said Citi is expecting only one more 25-basis-point hike in September, with the BSP expecting inflation to return to within the two to four percent target next year.

“Stronger recovery momentum will likely give BSP confidence to start hiking by 25 basis points on June 23, although it is likely to focus on anchoring inflation expectations,” Chutchotitham said.

At the previous meeting, the BSP still deemed that second-round inflationary pressures are limited and that it could look through near-term supply-side inflationary pressures.

The Duterte administration’s economic team has also proposed the extension of food supply measures to curb inflation. Additionally, the BSP, in its Monetary Policy Report, observed little gains in the number of salaried workers in the first quarter, suggesting that the regulator could buy time for more broad-based income recovery.

However, the American banking giant cited recent developments, including the sharp rise in inflation as well as the stronger-than-expected GDP growth in the first quarter that could pave the way for an interest rate liftoff on May 19.

Malaysian financial giant Maybank sees the BSP hiking interest rates by 75 basis points this year as ASEAN central banks are expected to deliver more rate hikes as currencies face selling pressure due to the more aggressive hikes by the US Federal Reserve.

Maybank expects the 2022 inflation to accelerate to 4.6 percent from the original forecast of 2.8 percent amid rising energy prices.

Energy, including fuel and utilities, accounts for around 14.8 percent of the CPI basket in the Philippines, while food has the largest share of 34.8 percent.

“Food prices surged to record highs in March as the Russia-Ukraine war intensified. The two countries are major exporters of commodities such as wheat, sunflower oil and fertilizer,” Maybank said.

Meanwhile, the central bank is seen resuming its tightening cycle this week with a 25-basis-point rate hike after a stronger-than-expected first quarter economic performance.

In its weekly brief, international think tank Capital Economics said the policy meeting on Thursday, May 19, will likely mark the lift-off for the Bangko Sentral ng Pilipinas (BSP).

The consensus remains for the BSP to keep rates unchanged.

However, several economists already said the central bank may raise rates this week following the robust 8.3 percent gross domestic product (GDP) expansion in the first quarter.

Senior Asia economist Gareth Leather has joined the rate hike bandwagon, saying the meeting on Thursday will signal the start of normalization for the BSP.

This is earlier than what BSP Governor Benjamin Diokno earlier hinted of a possible increase in policy rate by June.

Leather emphasized that inflation has risen to 4.9 percent in April due to higher global oil prices that impacted transport and food costs.

This is coupled with the stronger-than-expected GDP growth in the January to March period which beat expectations and allowed the economy to return to pre-COVID levels.

“Economic recovery proves resilient to the Omicron wave in the first quarter. With day- to-day disruption from the virus largely in the rear-view mirror, growth is likely to remain strong this quarter,” Leather said.

However, he warned that headwinds are still mounting as the boost from reopening will start to fade while higher inflation will start to drag on consumption.

“We doubt the BSP will embark on an aggressive tightening cycle. The BSP itself has consistently signaled that it will take things slow and steady,” Leather said.

“A key thing to look out for at Thursday’s meeting is whether this messaging stays the same,” he said.

Apart from the 25 bps hike this week, Capital Economics is also expecting another 25 bps increase toward the end of the year.

The BSP has been keeping the benchmark interest rate at an all-time low of two percent for the past 18 months or since November 2020, when it delivered the last 25 bps rate cut.

This is still part of the government’s move to cushion the impact of the two-year pandemic on the overall economy. – Louise Maureen Simeon