Philippines: Key policy rate seen hitting 6% next year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to hike key policy rates by 175 basis points more, bringing the benchmark interest rate to six percent by the first quarter of next year, according to DBS Bank of Singapore.

Chua Han Teng, economist at DBS, said the bottom line is that the BSP remains hawkish and has further room to go in its inflation fight.

Teng said BSP Governor Felipe Medalla already telegraphed a 75-basis-point policy rate hike in the upcoming meeting of the BSP on Nov. 17.

This would bring the benchmark overnight reverse repurchase rate to five percent, the highest policy rate since 2009.

To tame inflation and stabilize the peso, the central bank has so far raised interest rates by 225 basis points to 4.25 percent, the highest since the 4.50 percent in June 2019, from an all-time low of two percent.

The BSP has already signaled that it would match the aggressive rate hikes delivered by the US Federal Reserve point by point to maintain the 100-basis-point interest rate differential.

“We, therefore, dial up our Philippines terminal policy rate forecasts by another 100 basis points to six percent by the first quarter of next year, with a possible 50- basis-point hike during 2022’s final meeting in December to match our Fed’s expectations,” Teng said.

Inflation averaged 5.4 percent in the first 10 months, exceeding the BSP’s two to four percent target, after quickening to a 14-year high of 7.7 percent in October from 6.9 percent in September.

On the other hand, the peso has slumped to an all-time low of 59 to $1 several times last month before bouncing back momentarily to the 57 to $1 level before weakening to the 58 to $1 level last week.

The local currency has depreciated by as much as 15.7 percent from the end- 2021 level of 50.999 to $1 due to the hawkish US Fed and the record trade deficit amid strong imports with the further reopening of the economy.

Aside from matching the US Fed rate hikes to maintain the interest rate differential, Teng said the BSP is pre-emptively addressing concerns of a weaker peso versus the dollar.

Furthermore, he said the central bank is strongly committed to bring inflation down to the two to four percent target in the second half of 2023.