BSP leaves door open for rate hike

Despite hawkish pause

MANILA, Philippines — Despite the hawkish pause from its tightening cycle in the last three rate-setting meetings, the Bangko Sentral ng Pilipinas (BSP) has left the door open for another rate hike if the upside risks to inflation materialize.

In a television interview with CNBC, BSP Governor Eli Remolona Jr. said monetary authorities are ready to respond as necessary to safeguard the inflation target of two to four percent.

After a cumulative 425-basis-point hike between May last year and March this year, the central bank decided to pause its tightening cycle, keeping interest rates on hold because of the downward trend in inflation, stable peso and the slowdown in gross domestic product (GDP) growth.

“I think a hawkish pause is the right way to describe it. We go where the data lead us, but the data seem to be going in two different directions. So I think a pause is prudent, but we’re ready to hike if the upside risks materialize,” Remolona said.

The BSP raised its inflation forecasts to 5.6 percent for this year, 3.3 percent for 2024, and 3.4 percent for 2025 due to rising global oil prices, higher-than-expected wage adjustments and the recent developments in the peso-dollar exchange rate.

“The supply shocks can have their effects on expectations. And so we try to moderate those shocks by working on the demand side for the same commodities and for a broader range of commodities. So it’s a balancing act. We try to figure out how strong the lagged effects are and how expectations are evolving,” Remolona said.

Inflation averaged 5.8 percent from January to July, still above the BSP’s two to four percent target range.

The BSP chief said the consumer price index (CPI) is more subject to demand or to the tightening of monetary policy.

“And so that effect seems to be working with a long lag, but nonetheless we think we are now within the striking distance of the target range. So we think we will be within the target range by the end of this year and certainly by 2024 and 2025,” Remolona said.

DBS Bank senior economist Radhika Rao said the post-decision commentary of the BSP governor was geared toward highlighting pipeline risks, including the recent climb in global energy and food prices, particularly rice, as well as domestic catalysts like transport costs, minimum wage increases, utilities and a weaker peso.

“Against this backdrop, the governor reiterated his readiness to hike rates anew if the data so warranted,” Rao said.

Rao said the central bank is likely to keep the benchmark interest rate steady at 6.25 percent for the rest of the year unless the US Federal Reserve delivers more rate hikes in September and October.

“We expect the policy rate to be held unchanged for the remainder of the year, with odds of further tightening back on the table if the US Fed follows-through with a hike in Septeber and October,” Rao said.

Aris Dacanay, economist for ASEAN at HSBC, said the overall tone of the BSP was slightly hawkish as it acknowledged that inflation risks are tilted to the upside.

“According to the governor, he sees no monetary easing in the next meeting and the BSP is ready to tighten its monetary stance further if needed,” Dacanay said.

He said the BSP is expected to keep policy rates steady at 6.25 percent and maintain a hawkish bias until the US Fed signals the beginning of its easing cycle.

Remolona reiterated that the BSP still has room to further raise key policy rates without sacrificing economic growth.

“The softness seems to be about special factors. So we expect that there will be some recovery in the third quarter. But I think we have room to hike without contracting the economy,” Remolona said.

Assuming the benchmark rate is pegged at 6.25 percent and an average inflation of three percent for 2024, Remolona said the neutral or natural rate of interest is 3.25 percent.

“Something we call the neutral or the natural rate of interest is closer to four percent in real terms. If our projections are right, we will be at 3.25 percent in real terms for the neutral interest rate. So we have room to hike,” he said.