High interest rates seen prevailing next year

MANILA, Philippines — British banking giant HSBC sees the Bangko Sentral ng Pilipinas (BSP) maintaining higher interest rates until the first half of next year after raising rates by a total of 75 basis points this year.

In a virtual press conference, Aris Dacanay, economist for ASEAN at HSBC, said the BSP may deliver three 25-basis-point rate increases within the first half, bringing the overnight reverse repurchase rate to 6.25 percent this year.

“With risks (to inflation) still dominating on the upside, we do think that the BSP will hike interest rates by 25 basis points in each of the next three rate-setting meetings until pausing at 6.25 percent. We do not expect any cuts in 2023. We expect the first cut to happen in the second half of 2024,” Dacanay said.

He said the US Federal Reserve may hold its rates longer than 2023.

The BSP raised its key policy rates by 350 basis points last year, bringing the overnight reverse repurchase rate to a 14-year high of 5.50 percent from an all-time low of two percent to fight inflationary pressures and stabilize the peso.

Inflation averaged 5.8 percent last year, breaching the BSP’s two to four percent target range, from 3.9 percent in 2021 after accelerating to a 14-year high of 8.1 percent in December from eight percent in November.

Dacanay said inflation may have already peaked last month and should begin its gradual descent soon to reach the central bank’s two to four percent target range by October.

According to Dacanay, HSBC expects inflation to ease to five percent this year and further to 3.6 percent next year.

He said inflation may hover at 7.1 percent in the first quarter before easing to 5.6 percent in the second quarter, 4.3 percent in the third quarter and 2.9 percent in the fourth quarter.

“The BSP would like to keep everything on hold knowing that upside risks to the inflation still dominate,” Dacanay said.

The economist said the decision of Malacañang to extend the lower tariffs on swine meat, rice, corn, and coal until December this year would help contain inflation.

President Marcos signed Executive Order 10 on Dec. 29, 2022 wherein fresh, chilled or frozen swine meat, maize, rice, and coal would be subject to the most favored nation (MFN) rates of duty until the end of the year.  Coal shall be applied zero duty beyond 2023.

“It helps slow down the rise in inflation,” Dacanay said.

However, he pointed out that inflation would begin to accelerate next year at 3.2 percent in the first quarter, 3.6 percent in the second quarter, and 3.8 percent in the third quarter with the expiration of the lower import tariffs on certain agricultural products.

The British banking giant sees the country’s gross domestic product (GDP) growth slowing down significantly to 4.4 percent this year before accelerating to 5.2 percent next year from the projected 6.9 percent last year.

BSP Governor Felipe Medalla said the central bank is likely to kick-off its rate-setting meetings by delivering another rate hike of between 25 and 50 basis points next month to anchor inflation expectations.

Medalla said the pressure to match the aggressive rate hikes by the US Fed is already waning as the peso has bounced back strongly after depreciating to an all-time low of 59 to $1 last October.

“In that scenario, you have a weaker dollar to begin with, so the pressure on us to match US increases will be much lower,” Medalla said.