Economists say BSP not done after off-cycle move
MANILA, Philippines — Monetary authorities are expected to further increase interest rates after the Bangko Sentral ng Pilipinas (BSP) delivered a 25-basis-point rate hike during an off-cycle rate-setting meeting on Thursday, according to economists.
BMI Country Risk & Industry Research expects the BSP to raise key policy rates by another 25 basis points next month as inflation is unlikely to ease within the central bank’s two to four percent target range this year.
“With headline inflation expected to stay higher for longer and the BSP’s still hawkish slant, we now expect policy rates to be hiked once more by 25 basis points in November,” BMI said.
The research arm of the Fitch Group has long flagged the possibility that the BSP would resume its hiking cycle after maintaining a hawkish pause for four straight rate-setting meetings in May, June, August and September.
Inflation accelerated for the second straight month to 6.1 percent in September from 5.3 percent in August after easing for six straight months to 4.7 percent in July from a peak of 8.7 percent in January.
This brought the headline inflation average to 6.6 percent during the nine-month period, higher than the BSP’s two to four percent target.
“And our expectations for headline inflation to fall below the BSP’s target of four percent in the fourth quarter now seem increasingly unlikely,” BMI said.
BMI raised its 2023 inflation forecasts to 4.7 percent from four percent and to four percent from 3.6 percent for next year.
The BSP delivered a 25-basis-point off-cycle rate hike on Thursday, raising the reverse repurchase rate to a fresh 16-year high of 6.50 percent.
According to BMI, the BSP’s hawkish rhetoric shows that it “is prepared for follow-through monetary policy action as necessary to bring inflation back to a target-consistent path, in keeping with its price stability mandate.”
In addition, it added that BSP Governor Eli Remolona Jr. has indicated that the policy rate could rise to 6.75 percent before harming the economy.
This provides BMI with confidence that another interest rate hike may occur at the Monetary Board’s subsequent meeting on Nov. 16.
“That said, we think that further monetary tightening will do little to help curb price pressures. Admittedly, the spike in consumer prices was largely driven by supply-side challenges.
BMI believes inflation will stay elevated until policies aimed at quelling supply side constraints are implemented.
Jun Neri, lead economist at Bank of the Philippine Islands, is not ruling out another rate increase next month.
“Despite the off-cycle hike, we can’t rule out another rate hike in the next policy meeting on Nov. 16. The decision of the BSP will depend on the upcoming data, as well as the behavior of the exchange rate,” Neri said.
Neri pointed said an inflation print that is significantly higher in October than September’s 6.1 percent may trigger another rate hike.
Aside from this, he said the central bank could also consider a rate hike if the exchange rate breaches the 57 to $1 level and moves closer to 58.
According to Neri, inflation in recent months has been driven mostly by supply-side factors, especially constraints in the agriculture sector.
“Nevertheless, the effectiveness of rate hikes in bringing down inflation shouldn’t be downplayed. Monetary policy continues to have a role in managing inflation even if the cause is mostly on the supply side. Inflation driven by supply may eventually lead to second round effects, which the BSP aims to counter with its rate hikes,” he said.
He added that the BSP’s credibility as an inflation fighter is also another reason why another rate hike is necessary despite the fact that inflation is driven mostly by supply issues.
“The rate hike is a statement from the BSP that it is determined to bring inflation back to its target. Inflation expectations may shoot up further if the market doesn’t see any action from the BSP. It might hurt the BSP’s credibility and make it more difficult to bring down inflation,” he said.
The BSP has so far raised interest rates by a total of 450 basis points since May last year to tame inflation and stabilize the local currency.