Hike rates

BSP could raise rates by 50 basis points – poll

People walk through a market in Marikina City on June 17. — PHILIPPINE STAR/ WALTER BOLLOZOS

By Keisha B. Ta-asan

THE BANGKO SENTRAL ng Pilipinas (BSP) is widely is expected to raise the benchmark rate on Thursday, with most analysts forecasting a 50 basis point (bp) increase afterflation accelerated to a nearly four-year high in July.

A Business world A poll last week showed that 16 out of 18 analysts expect the Monetary Board to raise its benchmark interest rate at its August 18 meeting.

For 13 analysts, the central bank could deliver a hike of 50 bps, while three analysts see a hike of 25 bps. Only two analysts expect the BSP to keep rates unchanged.

Analysts' expectations on key rates (August 18)

“Given the Iffifth consecutive month of collection inflrationing rate at… 6.4% in July, which translates into an annual total offlration rate of 4.7% compared to 3.9% last year, and given ourflinterest rate will remain high and only peak around 6.5%-6.6% from September to October before easing, we expect BSP to continue raising interest rates by another 50 basis points at its meeting next week,” said Suhaimi Bin Ilias, chief economist at Maybank Investment Bank.

The latest data from the Philippine Statistics Authority (PSA) showed the consumer price index (CPI) rose 6.4% year on year in July, the fastest growth in 45 months or since the 6.9% recorded in October 2018.

“Inflation remains the key consideration as it affects growth and reopening and thwarts consumption – the main driver of the economy,” Security Bank Corp. chief economist Robert Dan J. Roces said in an email.

“Thus, the larger-than-expected slowdown in Q2 GDP (gross domestic product) should not deter the BSP from raising interest rates by 50 basis points on August 18,” Roces added.

The Philippine economy grew 7.4% in the second quarter, up inflation weighed on consumer spending, based on preliminary data released by the PSA.

Printed growth in the second quarter was lower than 12.1% a year earlier and 8.2% in Iffirst trimester.

MUFG Bank analyst Sophia Ng said in an email that tamingflation itself could help boost private consumption, which slowed from April to June.

Household spending fell by 2.7% quarter on quarter, as inflation accelerated due to rising food and fuel prices.

“The recent GDP figure further demonstrates that demandflation may not yet be at work in the Philippines,” said China Banking Corp. chief economist Domini S. Velasquez.

With the off-75 basis point cycle in July, the Monetary Board has raised benchmark interest rates by a total of 125 basis points so far this year.

“The BSP has no recourse but to raise the policy rate an additional 50 basis points to keep up with the nearly 200 basis points that the US Federal Reserve has instituted to mitigate the impact of the US recession,” Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez said in an email.

The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 75 basis points in July. The US central bank’s overnight interest rate is now between 2.25% and 2.50%.

Despite US inflation cooling to 8.5% in July from 9.1% in June, Fed officials said they were open to the possibility of a bigger rate hike in September if the inflation remained persistently high.

“In such an environment, uncertainties surrounding the stance of U.S. monetary policy and global growth could exacerbate peso weakness and heighten risks of furtherflation,” said Debalika Sarkar, economist at ANZ Research.

The local unit ended at 55.61 pesos to the dollar on Friday, 31 centavos weaker from its close of 55.30 pesos on Thursday, based on data from the Philippine Bankers Association. It also depreciated 41 centavos against its P55.20-a-dollar Ifend a week earlier.

On the other hand, Chief Economist of UnionBank of the Philippines, Inc. Ruben Carlo O. Asuncion expects the BSP to raise interest rates by 25 basis points due to the GDP of the second quarter weaker than expected.

“Even with the fairly respectable impression of 2Q22 GDP year over year, it is difficult not to notice the sequential decline in annual growth in Q2, especially after a year of quarterly gains,” Asuncion said in an email.

PSA data showed the country’s economic output fell 0.1% on a seasonally adjusted quarterly basis.

Asuncion said the Philippine economy will continue to face headwinds that are likely to slow growth in the second half, such as recession risks in major economies, geopolitical tensions and risingflation.

A BREAK SOON?
For Miguel Chanco, the Hall of Fame’s chief economist for emerging Asia, the “very disappointing” second-quarter GDP could prompt the BSP to keep rates unchanged on Thursday.

“We’ve been saying since the bank’s last rate hike that a weak second-quarter GDP report would force the BSP to take a break in August, especially if it’s accompanied by signs that inflation is Ifultimately fabric softener,” Chanco said in an email.

“Essentially, the latter is now also taking shape, with global oil prices and domestic prices at the pump starting to reverse significantly,” he added.

National Bank of the Philippines economist Alvin Joseph A. Arogo said the BSP should consider a temporary pause in tightening only when the key rate hits 4.25%.

“We expect 4.25% by the end of 2022: 50 basis points in August, 25 basis points in September, 25 basis points in November,” Arogo said.

For Ms. Velasquez, she expects the BSP to continue raising rates by 25 basis points, until it reaches 4% by the end of 2022.

Meanwhile, Ms Ng said a break after August is unlikely as inflation is expected to remain high and above BSP’s target range of 2-4% for this year.

“Furthermore, while BSP expects inflation to take longer to return to its inflation target range, the need for further tightening remains, although this is likely to be at a more gradual pace. “said Ms Ng.

Bank of the Philippine Islands (BPI) chief economist Emilio S. Neri, Jr. said the central bank could provide another off– rise in the cyclical rate if the peso depreciates further in the months to come.

“BSP might be required to hike off-cycle again if the FOMC increases more aggressively in September forcing BSP to sell foreign exchange reserves,” Neri said in a Viber message.

After Thursday, three more meetings of the Monetary Council are scheduled this year – September 22, November 11 and December 15.