Economists mixed on BSP’s next move

MANILA, Philippines — Economists are split over the next policy move of the Bangko Sentral ng Pilipinas (BSP) after it delivered an off-cycle 25-basis-point hike last Thursday.

While some foreign bank economists expect the BSP to deliver another rate increase, some are penciling a pause wherein interest rates would be left untouched anew.

Radhika Rao, senior economist at DBS Bank Ltd, said the off-cycle rate hike was a pre-emptive move ahead of the October inflation data due to be released on Nov. 7.

Rao said inflation is expected to reflect another jump on the back of high food and fuel prices.

The Singaporean bank said inflation further accelerated in October after quickening for two straight months to 5.3 percent in August and 6.1 percent in September.

Despite easing for six straight months to a year-low of 4.7 percent in July from a peak of 8.7 percent in January, headline inflation averaged 6.6 percent from January to September and stayed well above the central bank’s two to four percent target range.

Rao added that the peso has also been under pressure since July, nudging policymakers to prioritize financial stability.

“The door remains open for a follow-up hike this quarter if conditions warrant. We pencil in another increase this quarter, followed by a prolonged pause into the first half of 2024,” Rao said.

ANZ Research economists Sanjay Mathur and Dabalika Sarkar also forecast another 25-basis-point rate hike on Nov. 16 as inflation is no longer expected to ease within the central bank’s target range.

Mathur and Sarkar cited the admission by BSP Governor Eli Remolona Jr. that monetary authorities have fallen behind the curve and are open to further rate hikes.

“Accordingly, we are now adjusting our policy rate path to reflect another 25-basis-point rise in 2023. Our 2023 and 2024 end-year forecasts now stand at 6.75 percent,” they added.

ANZ said there is also a need to keep rates higher for longer as inflation is likely to stay above target within the first half of next year, before falling below four percent starting July next year.

“This, in our view, rules out any possibility of a policy pivot in 2024,” Mathur and Sarkar said.

For his part, Citi economist for the Philippines Nalin Chutchotitham said the Monetary Board is likely to leave key policy rates untouched until the first half of next year.

“At this juncture, we keep our forecasts unchanged (6.50 percent terminal rate to be maintained through the first half of month 2024 and rate cuts only in the third quarter of 2024) but see risks of further rate hikes,” Chutchotitham said.

The American banking giant said inflation further accelerated in October after quickening for two straight months to 5.3 percent in August and 6.1 percent in September.

“As we price in the latest Consensus Economics’ forecasts on 2023-2024 inflation, which increased in Oct. 2023 versus Sept. 2023, our estimate for real policy rate has become slightly lower than in previous note, but still considered a restrictive level vs. historical trend,” Chutchotitham added.

According to Chutchotitham, the BSP still has some reservations as it keeps its options open if the gross domestic product (GDP) growth again disappoints in the third quarter of the year.

HSBC economist for ASEAN Aris Dacanay said the off-cycle rate hike was meant to pre-empt the second round effects of higher rice and fuel prices as well as further pressure on the peso against the dollar.

“Moving forward, we think the BSP will keep its policy rate steady but remain very hawkish as headline inflation will likely remain sticky until the second quarter of 2024,” Dacanay said.

The British banking giant said the peso has been feeling the brunt of the strength of the dollar for quite some time now as US yields remain high.

Dacanay said the BSP has been defending the peso-dollar exchange rate from breaching 57:$1 since mid-August.

“Moving forward, we think the BSP will keep its policy rate steady at 6.50 percent in the November and December Monetary Board meetings. After all, core inflation is still threading downward, which means the BSP’s tight monetary stance is already in the works,” Dacanay added.

He said the BSP would continue to be hawkish despite keeping interest rates steady on Nov. 16 even if the US Federal Reserve delivers another rate increase.

“Since the off-cycle hike is pre-emptive in nature, we don’t think the BSP will hike interest rates in its November rate-setting meeting, even if the Fed hikes in November,” Dacanay said.