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Philippines: BSP seen raising rates up to 4.5%
MANILA, Philippines — Foreign banks are expecting the Bangko Sentral ng Pilipinas (BSP) to aggressively hike key policy rates by a total of 125 basis points to bring the benchmark rate to 4.50 percent by the end of the year.
This would be the highest interest rate since the 4.75 percent level in February 2019.
Due to soaring oil prices, the Monetary Board raised interest rates by 175 basis points to bring the reverse repurchase rate (RRP) to 4.75 percent from three percent to control inflation.
In a report, Japanese investment bank Nomura said the Philippine central bank remains clearly hawkish after delivering a massive 75-basis-point rate hike in a surprise off-cycle meeting on July 14 to contain inflation.
“Taking this into account, we revise up our terminal rate forecast of the RRP to 4.50 percent from 3.75 percent in this hiking cycle, which we expect to be reached by December’s meeting. In terms of the trajectory, we still expect a 50-basis-point hike at BSP’s next meeting on Aug. 18,” Nomura said.
The Japanese investment bank sees inflation rising further above the BSP’s two to four percent target and peaking by October, barring other price shocks.
“From there, we expect the BSP to hike by 25 basis points in each of the remaining three meetings of the year before pausing. This is also consistent with our US team’s forecast that the US Federal Reserve will hike by 50 basis points in September and by 25 basis points each in November and December,” Nomura said.
According to Nomura, the gross domestic product (GDP) growth of the Philippines is likely to fall sharply to 3.6 percent in 2023 from the projected 6.6 percent in 2022.
“The risk of a global recession will hit the local economy hard by next year, and will therefore be a concern for the BSP, not just via the export channel, but also via consumer spending when inflation risks are high and the labor market recovery is incomplete,” Nomura said.
This will prompt the BSP to cut key policy rates by a total of 50 basis points in the second half of 2023.
Likewise, DBS Bank Ltd. of Singapore also expects the benchmark policy rate in the Philippines reaching 4.50 percent by the end of the year, starting with an additional 50-basis-point rate hike on Aug. 18.
“A 50-basis-point rate hike in August is in play. There is still room to normalize and tighten policy at a fast pace to return to the pre-pandemic level of four percent. The likelihood of the policy rate reaching 4.50 percent by end-2022 is decent, especially if high inflation remains sticky above the BSP’s two to four percent target range,” DBS said.
According to Nomura, the surprise and forceful rate hike last July 14 has lowered the bar for aggressive policy tightening.
Headline inflation remained well above the two to four percent target, averaging 4.4 percent in the first half of the year after accelerating further to 6.1 percent in June from 5.4 percent in May.
“Beyond rapid commodity price increases, the BSP is also observing signs of second-round price effects. Therefore, the BSP saw an urgent need to anchor inflation expectations and temper upside inflation risks,” DBS said.
Source: https://www.philstar.com/business/2022/07/18/2196096/bsp-seen-raising-rates-45