By Keisha B. Ta-asan
THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to raise the benchmark rate on Thursday, with most analysts forecasting a 50-basis-point (bp) increase after inflation quickened to a near four-year high in July.
A BusinessWorld poll last week showed 16 out of 18 analysts anticipate the Monetary Board will increase its benchmark interest rate at its meeting on Aug. 18.
For 13 analysts, the central bank may deliver a hike of 50 bps, while three analysts see a 25-bp increase. Only two analysts expect the BSP to keep rates unchanged.
“Given the fifth consecutive month of pickup in inflation rate to… 6.4% in July resulting in year-to-date inflation rate of 4.7% vs 3.9% last year, and given our view that monthly inflation rate will stay elevated and peak around 6.5%-6.6% only in September to October before easing, we expect BSP to continue raising interest rate by another 50 bps at its meeting next week,” Maybank Investment Bank Chief Economist Suhaimi Bin Ilias said.
Latest data from the Philippine Statistics Authority (PSA) showed the consumer price index (CPI) climbed 6.4% year on year in July, the fastest growth in 45 months or since the 6.9% logged in October 2018.
“Inflation remains the key consideration as it affects growth and reopening and thwarts consumption — the main engine of the economy,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mail.
“Thus, the deeper-than-expected slowdown in 2Q GDP (gross domestic product) is unlikely to deter the BSP from raising interest rates by 50 basis points on Aug. 18,” Mr. Roces added.
The Philippine economy expanded by 7.4% in the second quarter as rising inflation weighed on consumer spending, based on preliminary data released by the PSA.
The second-quarter growth print was slower than 12.1% a year earlier and 8.2% in the first quarter.
MUFG Bank analyst Sophia Ng said in an e-mail that taming inflation itself could help boost private consumption, which saw a slowdown in the April to June period.
Household spending fell by 2.7% quarter on quarter, as inflation accelerated due to higher prices of food and fuel.
“The recent GDP figure further demonstrates that demand-pull inflation may not be at work yet in the Philippines,” China Banking Corp. Chief Economist Domini S. Velasquez said.
With the off-cycle hike of 75 bps in July, the Monetary Board has raised benchmark interest rates by a total of 125 bps so far this year.
“The BSP has no other recourse but to increase policy rate by another 50 basis points to follow the almost 200 basis points that the US Federal Reserve has instituted to soften the impact of the US recession,” Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said in an e-mail.
The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 75 bps in July. The US central bank’s overnight interest rate is now at a level between 2.25% and 2.50%.
Despite US inflation cooling to 8.5% in July from 9.1% in June, Fed officials said they are open to the possibility of a bigger rate hike in September if inflation remains persistently elevated.
“Against such a backdrop, uncertainties surrounding the US monetary policy direction and global growth could exacerbate peso weakness and increase the risks of further inflation,” ANZ Research economist Debalika Sarkar said.
The local unit ended at P55.61 per dollar on Friday, weaker by 31 centavos from its P55.30 close on Thursday, based on Bankers Association of the Philippines data. It also depreciated by 41 centavos from its P55.20-a-dollar finish a week earlier.
On the other hand, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion expects the BSP to raise interest rates by 25 bps due to the lower-than-expected second-quarter GDP.
“Even with the fairly respectable year-on-year 2Q22 GDP print, it is difficult not to notice the annual growth’s 2Q sequential dip especially after a year of quarterly gains,” Mr. Asuncion said in an e-mail.
PSA data showed the country’s economic output shrank by 0.1% on a seasonally adjusted quarter-on-quarter basis.
Mr. Asuncion said the Philippine economy will continue to face headwinds that will likely slow growth in the second half, such as recession risks in major economies, geopolitical tensions, and rising inflation.
A PAUSE SOON?
For Pantheon Chief Emerging Asia economist Miguel Chanco, the “very disappointing” second-quarter GDP may prompt the BSP to keep its rates unchanged on Thursday.
“We’ve been saying since the bank’s last rate hike that a weak Q2 GDP report would force the BSP into a pause in August, especially if it’s accompanied by signs that inflation is finally easing,” Mr. Chanco said in an e-mail.
“Crucially, the latter is now also taking shape, with global oil prices and domestic pump prices starting to roll over materially,” he added.
Philippine National Bank economist Alvin Joseph A. Arogo said the BSP should only consider a temporary pause in tightening once the key rate reaches 4.25%.
“We forecast 4.25% by end-2022: 50 bps in August, 25 bps in September, 25 bps in November,” Mr. Arogo said.
For Ms. Velasquez, she expects the BSP to continue raising rates by 25 bps, until it reaches 4% by end-2022.
Meanwhile, Ms. Ng said a pause after August is unlikely as inflation is seen to remain elevated and above the BSP’s 2-4% target band for this year.
“Further, if the BSP expects inflation to take a longer time to return to its inflation target range, the need for further tightening remains although that is likely to be done at a more gradual pace,” Ms. Ng said.
Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the central bank may deliver another off-cycle rate hike if the peso depreciates further in the coming months.
“BSP might be compelled to hike off-cycle again if the FOMC hikes more aggressively in Sept. forcing BSP to sell foreign exchange reserves,” Mr. Neri said in a Viber message.
After Thursday, there are three more Monetary Board meetings scheduled this year — Sept. 22, Nov. 11, and Dec. 15.