More economists bet on 25-bps rate hike

MANILA, Philippines — More economists are betting the Bangko Sentral ng Pilipinas (BSP) will dial down on its rate tightening cycle with a smaller 25-basis-point hike amid the slight easing of inflation last month.

Aris Dacanay, economist for ASEAN at HSBC, said the central bank’s Monetary Board is likely to hike key policy rates by 25 basis points on March 23 and another 25 bps on May 18.

“Despite global concerns on financial stability, we expect the BSP to hike by 25 bps this week and at the next meeting in May,” he said.

“We think the job’s not finished for monetary policy yet. Despite headline inflation easing by a 10th of a percentage point in February to 8.6 percent from 8.7 percent in January, we still expect the BSP to hike by 25 bps this Thursday to bring the policy rate to 6.25 percent,” Dacanay said.

Inflation averaged 8.6 percent in the first two months of the year. Last year, it went up to 5.8 percent – exceeding the BSP’s two to four percent target – from 3.9 percent in 2021.

Core inflation – which strips out prices of volatile items such as food and energy – however quickened further to 7.8 percent in February from 7.4 percent in January.

“The battle against inflation hasn’t subsided, with core CPI – which better represents the underlying trend of inflation – still running red hot. It accelerated to 7.8 percent year-on-year in February, the highest level since 1999,” Dacanay said.

According to Dacanay, the still elevated core inflation suggests that inflation momentum is still strong and there is an upside risk that price pressures will continue to spill over to other commodities.

Dacanay said the benchmark interest rate would stand at 6.50 percent in the first half despite the global banking turmoil regarding Silicon Valley Bank (SVB) and Credit Suisse, as the country’s financial system remains sound for now, notwithstanding the aggressive pace of rate hikes over the past 10 months.

“For instance, we think the system is still liquid given that the amount of bank funds parked with the BSP is higher than pre-pandemic levels,” Dacanay added.

For its part, Japan’s Nomura said it is now expecting the BSP to deliver three more 25-bp hikes in the three rate-setting meetings starting this month.

In its monthly global economic outlook, Nomura economists Euben Paracuelles and Rangga Cipta said this would bring the BSP terminal rate to 6.75 percent from an all-time low of two percent.

The central bank has so far raised key policy rates by 400 basis points since it started its interest rate liftoff in May last year, bringing the overnight reverse repurchase rate to a 16-year high of six percent.

Despite the slight easing in inflation to 8.6 percent in February, Nomura raised its inflation forecast to 5.8 percent for this year.

“Given our new inflation forecast and our US team’s view of further US Federal Reserve hikes in coming months, we add one more 25-bp hike by BSP to a terminal rate of 6.75 percent, and thus expect a 25-bp hike at each of the next three monetary board meetings,” Paracuelles and Cipta said.