Philippines: BSP seen to start raising rates in H2

MANILA, Philippines — The research unit of Australia and New Zealand Bank expects the Bangko Sentral ng Pilipinas (BSP) to deliver five rate hikes instead of only two this year, as upside risks to inflation forecasts have become more prominent with higher oil prices.

ANZ Research chief economist for Southeast Asia Sanjay Mathur and economist Debalika Sarkar said the BSP is likely to deliver its first 25-basis-point rate hike in June followed by similar hikes in each of the four remaining meetings in August, September, November and December.

“This takes our overnight reverse repurchase forecast to 3.25 percent by year-end 2022,” Mathur and Sarkar said in a commentary titled “Philippines: Rising Offs of Earlier Monetary Policy Recalibration.”

ANZ Research previously penned two rate hikes that would bring the benchmark rate to 2.50 percent this year. It was originally expecting the BSP to deliver its first rate hike in the fourth quarter.

“However, the inflation equation has made matters more complicated, which in our view, cannot be left unaddressed by the authorities for a prolonged period. As such, BSP officials have hinted that policy normalization will commence in the second half, but we think that an earlier start will be necessary. The tightening cycle will also need to be a deep one,” Mathur and Sarkar said.

The BSP has kept an accommodative stance for more than a year after slashing interest rates by 200 basis points in 2020 as part of its COVID response measures.

ANZ Research now expects inflation to average 4.2 percent instead of 3.9 percent this year after accelerating to four percent in March from three percent in February due to higher global oil prices brought about by Russia’s invasion of Ukraine.

In fact, it now expects inflation to average 4.6 percent in the second quarter, well above the BSP’s two to four percent target range.

According to ANZ, higher commodity prices were manifested in transportation costs, utility bills and food prices. Cumulatively, food and beverages, housing and utility and transport subcategories contributed close to 320 percentage points to the headline consumer price index (CPI).

“Against this backdrop of rising inflation, it will be challenging for the BSP to continue to maintain its pro-growth accommodative stance,” ANZ said.

It warned that higher oil and commodity prices could pave the way for broader price increases.

ANZ also cited the limited fiscal intervention, while firms may not be able to hold back on price increases for long.