Philippines: Rates to rise by another 75 bps

As inflation continues to accelerate  

MANILA, Philippines — Economists are expecting the central bank to deliver another huge 75-basis-point hike on Thursday, as pre-announced by Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla.

Security Bank chief economist Robert Dan Roces said the aggressive rate hike is justified as inflation accelerated to a 14-year high of 7.7 percent in October from 6.9 percent in September.

“As pre-announced, we expect another 75 basis points, which is justified by inflation’s spike last month, and the very good growth numbers for the third quarter,” Roces said.

The Philippines posted a 7.6-percent gross domestic product (GDP) growth in the third quarter despite soaring inflation and the weakening of the peso against the dollar.

This brought the average expansion to 7.7 percent after the GDP grew by 7.6 percent in the second quarter and by 8.2 percent in the first quarter, slightly above the 6.5 to 7.5 percent target set by economic managers.

Medalla had stressed the need to match the aggressive rate increases delivered by the US Federal Reserve to maintain the interest rate differential.

UnionBank chief economist Ruben Carlo Asuncion said the BSP’s terminal rate would have to be 100 basis points higher than the US Fed’s terminal rate, as previously articulated by the BSP governor.

“The next critical question would be how much more will they hike after Thursday,” Asuncion said.

The BSP has so far raised its key policy rates by 225 basis points, bringing the benchmark rate to 4.25 percent, the highest since June 2019, from an all-time low of two percent.

With the much anticipated hike on Thursday, the overnight reverse repurchase rate will reach five percent by Nov. 17.

Domini Velasquez, chief economist at China Bank, said the central bank would likely deliver another huge 75-basis-point hike, matching the rate increase during an off-cycle rate-setting meeting last July 14.

“Markets might be reacting this way also because they’ve already priced in 75 basis points from assured statement two weeks ago,” Velasquez said.

Dutch financial giant ING is expected the central bank’s Monetary Board to push through with the promised 75-basis-point hike this week.

With the currency steady and back to the 57 range versus the dollar after slumping to an all-time low of 59 to $1, ING Bank senior economist Nicholas Mapa said there is no need for an emergency rate hike.

“Forward guidance worked and helped keep concerns in check with the peso appreciating this week,” Mapa said.

With the resilient and stronger-than-expected GDP growth in the third quarter, Mapa said the central bank may likely push its key policy rate to 5.5 percent by the end of the year.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said that further local policy rate hikes could still be possible for the coming months, as supported by generally stronger economic data, future Fed rate hikes as well as the behavior of the peso exchange rate going forward.

Ricafort said the overnight reverse repurchase rate could settle between 5.5 and six percent by the end of the year or early next year to help stabilize the peso and overall inflation.

“Higher local policy rates would lead to some increase in borrowing and financing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures,” Ricafort said.

Medalla told members of the Economic Journalists Association of the Philippines (EJAP) Friday evening that the Philippines is facing more challenges than ever in the economic front.

“I have said before that this may be the most difficult time since I joined the Monetary Board more than a decade ago. We are facing very difficult challenges,” Medalla said.

The BSP chief cited the very aggressive US Fed as well as the Ukraine-Russia conflict that pushed up the prices of oil and non-oil commodities, along with domestic supply issues.

Medalla reiterated his commitment to match the aggressive rate hikes delivered by the US Fed point by point to prevent a narrowing of the interest rate differential between the US and the Philippines.

“I have already communicated that we are prepared to match the Fed. Since they hiked by another 75 basis points, you can expect that I will be voting to raise the policy rate by a similar magnitude. The reason we do this is to increase the likelihood that headline inflation will be within target by the second half of next year and hopefully, for the rest of 2024,” Medalla said.