BSP expected to keep rates steady

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may keep interest rates steady for a fourth straight rate-setting meeting on Thursday despite the uptick in inflation to 5.3 percent in August after cooling for six straight months, according to economists.

Philippine National Bank economist Alvin Arogo said the BSP is likely to leave the key policy rate untouched for the rest of the year amid the relatively weaker economic growth outlook and the easing of inflation within the central bank’s two to four percent target range by the fourth quarter.

“As a baseline view, we believe that the BSP will decide to leave the key policy rate unchanged during its upcoming meetings in September, November and December,” Arogo said.

However, Arogo said the BSP may need to temporarily sacrifice supporting economic expansion until the peso stabilizes if the local currency continues to substantially weaken due to a more hawkish US Fed.

“As such, a final 25-basis-point hike this year still has a fair chance of happening, whereas a rate cut is very unlikely,” Arogo said.

China Bank chief economist Domini Velasquez said the central bank is expected to hold its key policy rate at 6.25 percent despite an uptick in inflation last month.

“Despite this, we also expect the BSP to maintain its hawkish stance given persisting upside risks to the inflation outlook, particularly the continued increase in global oil prices,” Velasquez said.

She pointed out that the US Federal Reserve is likely to pause hiking its interest rates on Sept. 20, potentially marking an end to its current hiking cycle.

“If realized, this would maintain the current 75-basis-point interest rate gap and alleviate downward pressure on the peso,” Velasquez added.

She said inflation expectation remains well anchored as it is expected to ease within the target range by the fourth quarter as the mandated price cap on rice would help ease price pressures for this month.

“Hopefully, the expected delivery of imported rice and harvest this end-September should help ease price pressures,” she said.

Inflation quickened to 5.3 percent in August after easing for six straight months to 4.7 percent in July from a peak of 8.7 percent last January. This brought the average to 6.6 percent during the eight-month period, well above the BSP’s two to four percent target range.

The inflation downtrend and the slowdown in gross domestic product (GDP) growth to 4.3 percent in the second quarter from 6.4 percent in the first quarter have allowed monetary authorities to extend their hawkish pause for three straight rate-setting meetings in May, June and August.

The BSP has emerged as the most aggressive central bank in the region after raising key policy rates by 425 basis points between May last year and March this year to tame inflation and stabilize the peso.

ING Bank senior economist Nicholas Mapa said the central bank has already indicated the preference to extend the pause in the near-term.

“So no change for the upcoming meeting. We believe the hurdle for additional rate hikes will be quite high given the glaring slowdown in growth momentum,” Mapa said.

He said the BSP admitted that tightening efforts have yet to be fully felt with the lagged impact still feeding through to bank lending.

“Rate hikes tend to slow growth momentum and can only be offset if countered with additional measures from the fiscal side, like in the US,” Mapa added.

The economist said the market has priced in the recent 25-basis-point hike delivered by the European Central Bank, while the US Fed is widely anticipated to pause this week.

“Lastly, BSP remains cognizant that the recent price shock is supply side in nature and best dealt with through fiscal direct intervention. The BSP will only hike should inflation expectations become de-anchored or to steady the currency,” Mapa said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the economic team has already signaled a hawkish pause for the meantime and a possible rate cut as early as the first quarter of next year.

However, Ricafort said a possible 25-basis-point hike by the US Fed in November would have to be considered by the BSP as this would further narrow the interest rate differential between the US and the Philippines to only 50 basis points, not enough to help stabilize the peso, import costs and overall inflation.