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Philippines: Higher rate hike seen this month

As inflation blows past expectations

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to deliver a higher rate hike this month as inflation blew past expectations, hitting a new 14-year high at 8.7 percent in January from 8.1 percent in December, according to S&P Global Ratings and bank economists.

In a report, S&P chief economist for Asia-Pacific Louis Kuijs said the Philippines, Australia and New Zealand are more prone to rate rises because of elevated core inflation.

“In Australia, New Zealand and the Philippines, the case for central banks to raise policy rates further seems strong,” Kuijs said.

According to the debt watcher, core inflation rose throughout 2022 and reached an average of 0.7 to 0.9 percent a month in the fourth quarter amid resilient domestic demand.

Core inflation averaged 8.6 percent in the Philippines in 2022.

The Philippine Statistics Authority (PSA) reported yesterday that headline inflation blew past expectations, hitting 8.7 percent in January and exceeding the BSP’s forecast of 7.5 to 8.3 percent. This was the highest since the 9.1 percent recorded in November 2008.

Inflation was recorded at only three percent in the same month last year.

Core inflation likewise accelerated to 7.4 percent in January from 1.8 percent in the same month last year. Core inflation is the change in the cost of goods and services, excluding those from the food and energy sectors.

“In many economies, modest core inflation momentum suggests limited or no further monetary policy tightening this year. But in some economies, recent hefty increases in core prices are forcing central banks to consider more rate hikes. Australia, New Zealand and the Philippines belong in this group, in our view,” Kuijs said.

Kuijs said the elevated core inflation in recent months is fueling expectations of further policy rate increases.

The BSP raised key policy rates by 350 basis points, which brought the benchmark interest rate to a 14-year high of 5.50 percent last year from an all-time low of two percent.

Aris Dacanay, economist for ASEAN at HSBC, said the January consumer price index (CPI) sprinted past expectations as supply challenges persisted, demand pressures remained strong and second round effects reverberated.

“No one saw it coming. In fact, the market expected it to go down,” Dacanay said.

Given the enormous upside surprise in CPI and supported by a strong gross domestic product (GDP) growth of 7.2 percent in the fourth quarter of last year, Dacanay said the upside risk of another punchy rate hike in February was higher.

The first of the eight rate-setting meetings of the BSP is scheduled on Feb. 16.

The British banking giant said headline inflation in the Philippines was the highest in 14 years and the highest in ASEAN, while core inflation was the highest since April 1999.

Dacanay said inflation in the Philippines has yet to reach the peak, while inflation rates in most of ASEAN have been treading downward since the fourth quarter of last year.

“This was the 11th consecutive month of inflation accelerating. And momentum is still relentless,” Dacanay said.

He said the chance of a higher rate hike by the BSP this month is higher.

“Given the eye-watering rise in prices, risks are on the upside when it comes to our baseline forecast of a 25-basis-point increase by the BSP next week – more so given the higher-than-expected GDP growth of 7.2 percent year-on-year in the fourth quarter of 2022, which brought the full-year growth to 7.6 percent, the highest in the last 46 years,” Dacanay said.

ING Bank senior economist Nicholas Mapa said the BSP may raise key policy rates by 50 basis points instead of 25 basis points next week.

“We penciled in a 50-basis-point rate hike for the first half, but given today’s inflation report, we could see the BSP front-loading hikes to next week,” Mapa said.

Mapa explained that both monetary and fiscal measures are needed to bring inflation, driven by a confluence of supply and demand factors, lower.

“We’ve been flagging how broad-based inflation was becoming, with now more than 70 percent of the CPI basket with inflation above target and nine out of 13 sub-categories reporting inflation past four percent,” Mapa said.

Both BSP Governor Felipe Medalla and Finance Secretary Benjamin Diokno earlier said inflation already peaked at 8.1 percent last December.

Source: https://www.philstar.com/business/2023/02/08/2243283/higher-rate-hike-seen-month