BSP seen raising rates by another 50 basis points

MANILA, Philippines — Economists are expecting the Bangko Sentral ng Pilipinas (BSP) to deliver an aggressive 50-basis-point interest rate hike on Thursday, bringing the benchmark rate to pre-pandemic levels.

China Bank chief economist Domini Velasquez said the Monetary Board is expected to continue its aggressive pace by raising key policy rates by another 50 basis points on Sept. 22 following the expected huge hike by the US Federal Reserve.

“This is largely due to an expectation of another jumbo hike from the Fed and the recent weakness of the Philippine peso. As inflation in the US remains hot, we expect the Fed not just to continue hiking aggressively, but also increase their terminal rate to clip inflation,” Velasquez said.

The BSP has so far raised interest rates by 175 basis points, bringing the overnight reverse repurchase rate to 3.75 percent from an all-time low of two percent. Authorities slashed interest rates by 200 basis points in 2020 as part of its COVID-19 response measures.

After hiking rates by 175 basis points in 2018 to 4.75 percent in end-2018 to curb rising inflation, the BSP reduced rates by 75 basis points to four percent in 2019 or prior to the COVID-19 outbreak.

With the additional 50-basis-point increase, the benchmark rate would settle at 4.25 percent.

“To keep interest rate differentials wide, the BSP will likely step up its pace, even if not with an equivalent amount,” Velasquez said.

According to the economist of the Sy-led bank, inflation is seen hitting new highs in the fourth quarter while the peso depreciates further to hit new record lows.

“As the peso breached its all-time low, we expect the BSP to be more mindful of further depreciation pressures as a cheap peso will add on to inflation for the rest of the year and in 2023,” Velasquez said.

ING Bank senior economist Nicholas Mapa also believes the Monetary Board would raise rates by 50 basis points on Thursday as “the Philippine economic recovery is in tact after months of support.”

The Dutch financial giant also sees the BSP delivering another 50-basis-point rate hike, bringing the benchmark rate to 4.75 percent by the end of 2022.

“The BSP will stay hawkish as the economy is on the mend and able to handle tightening,” Mapa added.

For his part, Security Bank chief economist Robert Dan Roces said inflation and peso weakness would remain the key consideration in the upcoming Monetary Board meeting.

“The BSP will need that early 50-basis-point hike to damp inflation, with the core beginning to pick up. Growth momentum, though slowing, remains strong and as such will be able to absorb the hike,” Roces said.

According to Roces, the move would also put a premium over the expected 75-basis-point hike by the US Fed before the scheduled rate-setting meeting of the Monetary Board on Sept. 22.

“Sticky inflation, which actually weakened private consumption in the second quarter and is poised to do so again this quarter, will compel the BSP to remain hawkish. We also expect another 25 basis points in its November meeting before a pause in the fourth quarter to give way for the peak consumption and remittance season,” Roces said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said an earlier or off-cycle 50-basis-point rate hike could not be completely ruled out in view of increasing market expectations of another jumbo hike by the US Fed.

Ricafort explained that the depreciation of the peso to an all-time low of 57.43 to $1 last Friday would further add to inflationary pressures. The local currency has depreciated by 12.6 percent from the end-2021 level of 50.999 to $1.

“The total peso depreciation of more than 12 percent since the start of 2022 may add to the costs of imports and overall inflation, thereby would require more aggressive local policy rate hikes in able to help stabilize the peso exchange rate, and, in turn, help better manage both inflation and inflation expectations,” Ricafort said.

RCBC sees inflation peaking at around seven percent in October.

“Thus, further local policy rate hikes could still be possible for the coming months, as supported by generally strong economic data; also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate, going forward,” Ricafort said.