BSP rate hike all but certain
KEY interest rates are expected to be raised anew this Thursday after inflation blew past expectations last month. All that remains to be answered is the size of the adjustment, with most analysts favoring a larger 50-basis-point (bps) hike instead of the 25 bps earlier projected.
At 8.7 percent, January inflation was significantly higher than the 7.6-percent market consensus and the Bangko Sentral ng Pilipinas’ (BSP) 7.5- to 8.3-percent forecast.
“We expect that the central bank will opt for a 50-basis-point hike in interest rates, rather than the previously expected 25 basis points, given the potential for hot inflation to drive higher inflationary expectations,” said Robert Dan Roces, an economist and Security Bank Corp. assistant vice president.
This would signal that monetary authorities were taking a more aggressive approach to controlling inflation, which last year breached the BSP’s 2.0- to 4.0-percent target to average 5.8 percent. In 2021, it was just 3.9 percent.
“With a proactive approach to monetary policy and a commitment to controlling inflation and anchoring inflation expectations, the central bank will look to mitigate these risks to balance the economic recovery environment,” Roces added.
The BSP’s policymaking Monetary Board raised key interest rates by a total of 350 bps last year after inflation began surging in the wake of Russia’s invasion of Ukraine. It hit a peak of 8.1 percent in December, after which economic managers said it would then gradually decline.
The BSP’s policy or overnight reverse repurchase rate currently stands at 5.5 percent, and a 50-bps increase will raise this to 6.0 percent, earlier seen by analysts as the likely terminal rate for 2023. The BSP’s overnight lending and deposit rates, meanwhile, are at 6.0 percent and 5.0 percent, respectively.
Jun Trinidad, treasury consultant for macroeconomics and markets at UnionBank, said the sustained absence of disinflation would only prompt the BSP to be more hawkish and drive the policy rate to 6.0 percent or more.
“This reinforces the drag from a high-interest rate environment likely to weigh on the credit-intensive sectors, e.g., real estate, while compelling investors to phase down or delay investment activities until the cost of money eases,” Trinidad added.
ING Bank Manila senior economist Nicholas Antonio Mapa, meanwhile, reiterated his view that the central bank could be setting up a 50-bps hike to corral inflation expectations.
Last week, commenting just after the release of January inflation data, he noted that BSP Governor Felipe Medalla had “previously sounded off on the possibility of pausing ‘as early as the first quarter’ but today’s (Thursday’s) inflation report likely means BSP will need to stay hawkish in the near term.”
A day earlier, Mapa had written that inflation was likely to stay “sticky” this year and also raised the issue of who would replace Medalla — described as the having managed to keep the peso via “a flurry of moves” including an off-cycle rate hike — when his term ends in June.
“We believe Medalla will continue to match Federal Reserve (Fed) rate hikes this year, and we have the BSP’s terminal rate at 6 percent by June,” Mapa wrote on February 8.
“The bigger question we are now faced with is who will be replacing Governor Medalla when his term expires by June. Medalla is not eligible for reappointment as he will reach the maximum tenure as a member of the Monetary Board by June,” he added.
Medalla was said to also favor maintaining a 100-bps differential with regard to the US policy rate and the earlier forecast of a 25-bps increase on February 16 was tied to the Fed having hiked a 25-bps last February 1.
Rizal Commercial Banking Corp. chief economist Michael Ricafort, for his part, is keeping to a 25-bps rate hike forecast for February but with two more of such in March and May.
“Any additional Fed rate hikes of about +0.25 [percentage point] each, especially on March 22, 2023 and May 2, 2023, could be matched locally on the next local rate-setting meetings on March 23, 2023 and on May 18, 2022 to maintain a more comfortable interest rate differential that helps stabilize the peso exchange rate and overall inflation,” Ricafort said.
He said inflation could be better addressed by non-monetary measures to increase the local supply of food and other commodities.
“Relatively elevated inflation in recent months would also be a consideration on the size of any further local policy rate hike/s. However, this is offset by the fact that supply side inflationary pressures, not due to higher demand, would not make further rate hikes effective,” he added.
The BSP said as much last Thursday when it declared that the “January 2023 inflation data points to the need for sustained efforts to combat price pressures, particularly non-monetary government measures to mitigate the impact of persistent supply side constraints.”
“The BSP remains focused on restoring inflation to the government target and stands ready to adjust its monetary policy settings as necessary to anchor inflation expectations and safeguard the inflation target over the policy horizon,” it added.
On Saturday, Medalla said that monetary authorities would continue to adjust their policy stance, “as necessary to keep further second-round effects at bay and prevent inflation expectations from becoming disanchored.”
The government expects inflation to hit 2.5 to 4.5 percent this year.