Latest data from the Department of Energy showed prices of gasoline, diesel, and kerosene increased by P28.70, P41.14, and P37.95 per liter respectively since the start of the year. — PHILIPPINE STAR/ MIGUEL DE GUZMAN
By Keisha B. Ta-asan
THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to raise interest rates on Thursday, with several analysts now forecasting a 50-basis-point (bp) increase after the aggressive tightening by the US Federal Reserve last week.
A BusinessWorld poll last week showed 15 out of 16 analysts anticipate the Monetary Board increasing its benchmark interest rate at its June 23 meeting. However, analysts appear divided on the pace of tightening, with nine analysts seeing a hike of 25 bps while six analysts anticipate an increase of 50 bps.
“Considering the current volatility of the economy, where inflation rate is at its highest since 2018 at 5.4% (in May) and expectations are high that this will further erode and may breach the government target… coupled with the US Federal Reserve decision to increase their policy rate to 75 bps, it is expected that local policy rate to likewise increase by another 25 bps,” Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said in an e-mail.
Inflation rose to 5.4% in May, the highest in three and a half years and above the BSP’s 2-4% target range. The BSP last month raised its average inflation estimate to 4.6% this year, higher than the previous estimate of 4.3%.
Makoto Tsuchiya, an economist at Oxford Economics, said the BSP will likely put more focus on elevated prices than economic growth at the next meeting, citing the stronger-than-expected gross domestic product (GDP) growth in the first quarter.
“We think the BSP will be wary of stifling the recovery and will continue to tread carefully between maintaining growth momentum and containing inflationary pressures,” Mr. Tsuchiya said.
The Philippine economy already surpassed pre-pandemic levels in the first quarter, with GDP expanding by 8.3%.
Economic managers are targeting a 7-8% GDP growth this year.
China Banking Corp. Chief Economist Domini S. Velasquez said a more measured monetary tightening cycle is ideal for the Philippines.
“We think that continued moderate hikes by the BSP will allow the economy to absorb interest rate increases at a more measured pace. In this time of uncertainty, it also provides time for the BSP to assess the impact of monetary tightening on our growth recovery,” she said.
In a June 14 roundtable with BusinessWorld editors, incoming BSP governor and current Monetary Board member Felipe M. Medalla signaled the pace of subsequent tightening will be gradual, ruling out rate hikes of more than 25 bps.
However, Mr. Medalla’s statement was made a day before the US Federal Reserve approved a 75-bp interest rate hike, its biggest since 1994.
The aggressive monetary tightening by the US Federal Reserve may spur capital outflows and put more downward pressure on the peso, some analysts said. This may prompt the Monetary Board to consider a 50-bp rate hike, they said.
Philippine National Bank economist Alvin Joseph A. Arogo said he now expects a 50-bp increase by the BSP after the Fed’s latest rate hike and the peso breaching the P53-$1 level.
The peso closed at P53.75 per dollar on Friday, weaker by 28 centavos from its P53.47 finish on Thursday, based on Bankers Association of the Philippines data.
It also shed 75 centavos from its P53 close a week earlier. This was the peso’s weakest close in over three and a half years or since its P53.80 finish against the greenback on Oct. 25, 2018.
“A 50-bp bump in June will let the BSP balance growth recovery and manage inflation, while getting ahead of the Fed’s pace. This should also help temper the peso’s weakness with the current account deficit projected at $19.1 billion this year,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mail.
Some analysts expect the BSP’s policy normalization to be gradual as inflation is expected to return to the 2-4% target range by 2023.
The Monetary Board kicked off its tightening cycle on May 19 by raising the yield on the BSP’s overnight reverse repurchase facility by 25 bps to 2.25%. Interest rates on the overnight deposit and lending facilities were also hiked to 1.75% and 2.75%, respectively.
This was the first increase in borrowing costs since 2018 and followed cuts worth 200 bps in 2020 as the BSP moved to support the economy amid the coronavirus pandemic.
“As things stand, we expect only two more interest rate hikes next year, taking the rate to 3%, implying that a full reversal of the COVID-era cuts is unlikely to take place until after 2023,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.
Moody’s Analytics analyst Sonia Zhu said the central bank may increase rates three more times, with the policy rate seen at 3% and above by end-2022.
Oxford Economics’ Mr. Tsuchiya said the BSP is likely to hike the policy rate by 100 bps this year.
“We expect the BSP to gradually continue tightening beyond this year, and unwind all the 200 bps cuts implemented at the onset of the pandemic by early 2024,” he said.
However, for ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa, the BSP should “not simply be in ‘normalization mode’ but it should assume a tightening stance” to curb red-hot inflation.
“We have the BSP back at 4% by early next year,” he added.
After Thursday, there are four more Monetary Board meetings scheduled this year — Aug. 18, Sept. 22, Nov. 11, and Dec. 15.