‘BSP firmly in inflation combat mode’

MANILA, Philippines — DBS Bank Ltd. of Singapore raised its inflation forecasts for 2022 and 2023 as the Bangko Sentral ng Pilipinas (BSP) is now firmly in combat mode to curb rising inflationary pressures.

In a report,  DBS said it is now expecting inflation to average at five percent for this year and four percent for next year.

“The BSP is firmly in inflation combat mode. Headline inflation is on a firm uptrend and is above the BSP’s two to four percent target. Inflation that has been driven by elevated commodity prices is feeding into second-round effects and rising inflation expectations, threatening the central bank’s price stability mandate,” DBS said.

It said the second-round upside price effects were seen from minimum wage hikes and increases in public utility jeepney fares, while the depreciation of the peso continues to add further upside pressures on imported inflation.

Inflation averaged 4.4 percent in the first half, exceeding the central bank’s two to four percent target, after quickening to 6.1 percent in June from 5.4 percent in May.

“Upside inflation pressures appear to have further room to run,” DBS said.

Based on its latest assessment, the BSP also raised its inflation forecasts to five   percent this year and to 4.2   percent in 2023.

Amid rising inflationary pressures, BSP Governor Felipe Medalla signaled a possible more aggressive rate hike of 50 basis points in August as the peso breached the 56 to $1 level early this month.

The central bank started its interest rate liftoff with a 25-basis-point rate hike last May 19, the first in more than three years or since November 2018, followed by another 25 basis points on June 23.

The back-to-back rate hikes brought the benchmark interest rate to 2.50 percent from an all-time low of two percent.

To cushion the impact of the pandemic on the economy, the BSP slashed interest rates by 200 basis points in 2020 as part of its COVID response measures.

“We think the BSP’s rate hiking cycle is just getting started, having hiked by 50 basis points to 2.50 percent thus far. A steepening tightening path looks increasingly likely, with much room to return to the pre pandemic rate of four percent,” it said.

The Singaporean bank sees an additional 100 basis points rate hikes for the remainder of the year, consistent with Medalla’s signal that the overnight reverse repurchase rate would end 2022 at 3.50 percent.

“We therefore adjust our expectations, with hikes potentially occurring in four remaining meetings in 2022. This would lift the policy rate to 3.50 percent, with

upside risks,” DBS said.

The central bank raised rates by a cumulative 175 basis points within five meetings in the 2018 cycle, with two 50 basis points to quell inflation.

“We are not ruling out 50- basis-point hikes in a single meeting, especially if inflation surprises positively due to the peso,” it said.