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Philippines: Smaller rate hike seen

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) sees the possibility of a smaller rate hike next month as inflation likely eased in February from a fresh 14-year high of 8.7 percent in January.

BSP Governor Felipe Medalla, in an interview with reporters on the sidelines of the Bankers Night 2023 last Friday, said there could be one more rate hike and that a 25-basis-point increase is likely.

Medalla said there is a great possibility that inflation already peaked in January and is likely to cool this month. “My main scenario is that it (February inflation) will be lower than January,” he said.

Aside from hiking key policy rates by another 50 basis points on Feb. 16, the BSP raised its inflation forecasts to 6.1 percent from 4.5 percent for 2023, and to 3.1 percent from 2.8 percent for 2024.

After accelerating to 5.8 percent and exceeding the BSP’s two to four percent target last year from 3.9 percent in 2021, inflation quickened to a fresh 14-year high of 8.7 percent in January from 8.1 percent in December.

“Let us put it this way, the main scenario is we will be below four percent by November or December… I think there’s a great possibility, if the non on monetary measures start working, then January will be the highest already,” Medalla said.

He said both Finance Secretary Benjamin Diokno and Socioeconomic Planning Secretary Arsenio Balisacan have convinced Malacañang to do more importation, with the commodities now starting to come in, such as in the case of sugar.

“Well, of course if inflation is still high. By the way, we are looking now at a month-on-month growth in inflation because whatever happens, because of sheer momentum, year-on-year will be high. So it is really the month-on-month now that we are watching,” the BSP chief said.

Medalla pointed out that monetary authorities remain hawkish after raising key policy rates by 400 basis points since the central bank started its interest rate liftoff in May last year.

This brought the benchmark interest rate to a 16-year high of six percent to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 last October. The BSP slashed key policy rates by 200 basis points to an all-time low of two percent in 2020 as part of its COVID-19 response measures.

“It’s still hawkish, if the results are bad, we will act. We are hawkish for a reason, it’s the data,” he reiterated.

According to Medalla, there is now beginning to have some demand components because rentals and restaurant prices also contributed to the surprise rise in inflation in January.

He said if another high month-on-month inflation happen, this may compel the BSP to raise policy rates by more than 25 basis points in its next rate-setting meeting scheduled on March 23.

“I’m not ruling anything, but I am saying though that if you look at zero, 25, 50, and 75. The extremes are less likely. But again, as I said if we have another surprise,” he said.

The BSP chief said a 75-basis-point increase is quite unlikely because the main impetus behind inflation is not demand. “What’s happening is what we call second order effects. Prices are rising because the previous increases influence future increases,” he explained.

Medalla said a pause from the tightening cycle is possible if the month-on-month increase in inflation becomes negative.

Source: https://www.philstar.com/business/2023/02/27/2247839/smaller-rate-hike-seen