Philippines: UK think tank sees BSP rate hike rollback in late 2023

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to roll back some of this year’s rate increases late next year as the country is expected to post slower economic growth and inflation in 2023, according to United Kingdom-based think tank Pantheon Macroeconomics.

In a report yesterday, Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said  the think tank expects some central banks in Asia including the BSP to start easing next year the rate hikes delivered this year.

“A broad-based slowdown in economic growth and inflation next year will likely result in a few central banks rolling back some of this year’s arguably excessive rate hikes, which were motivated in part by efforts to fight a losing battle against dollar strength,” he said.

For the BSP in particular, he said the think tank is pencilling a 50-basis-point (bp) easing in late 2023.

For this year, the BSP raised rates by a total of 350 bps, bringing the overnight reverse repurchase rate to a 14-year high of 5.5 percent.

Last month, the country’s headline inflation rate rose to eight percent, the highest in 14 years, driven by food prices.

This brought the average inflation for the first 11 months to 5.6 percent, below the 5.8 percent assumption of interagency Development Budget Coordination Committee (DBCC), but higher than the BSP’s two to four percent target.

Chanco said the think tank believes inflation has peaked in most of emerging Asia including the Philippines, and all countries should see within-target-range inflation by the middle of 2023.

“All benchmark policy rates will turn positive in real terms by this point and, more importantly, rise above their long-run averages by Q3 (third quarter). The tightening in real terms will be particularly painful in the Philippines, Thailand and Indonesia, but less so in India and Vietnam,” he said.

Pantheon Macroeconomics expects the country’s inflation rate to reach 5.8 percent this year and 3.8 percent next year.

The DBCC expects inflation to moderate to 2.5 to 4.5 percent next year.

While inflation is expected to ease next year, Chanco said domestic consumption is likely to struggle in the year ahead.

 “Filipino consumers had  a modest Covid- era savings cushion to land on as the cost-of-living crisis erupted, compelling them to dip into already-thin safety nets, and to rely on a near-vertical and irreplicable spike in consumption loans,” he said.

He said this year’s surge in remittances in local currency terms, which helped boost consumption, is expected to subside as the peso stabilizes.