Hike rates

More economists expect BSP to hike rates sooner

MANILA, Philippines — A growing number of economists believe the Philippines is poised to join the interest rate hike bandwagon as pressure for monetary tightening continues to mount.

In her weekly Asia Macro report, “Rising Pressure to Jump on the Rate Hike Bandwagon,” ANZ Research economist Krystal Tan said rising domestic inflation was becoming hard to ignore.

“It’s getting harder and harder for Asian central banks to resist the accelerating global trend of higher rates,” Tan said.

On the one hand, Tan pointed out that inflation in the Philippines has exceeded the central bank’s target range of 2-4%, while its trade balance is under pressure.

Inflation accelerated to 4.9% in April, the highest in more than three years, from 4% in March. The consumer price index last month exceeded the BSP’s 2-4% target.

“After the Reserve Bank of India, we expect the BSP to be among the next to bite the bullet and raise rates,” Tan said.

As part of its heavy COVID-19 response measures, BSP sharply cut interest rates by 200 basis points and lowered the reserve requirement ratio in 2020.

Since its last cut of 25 basis points in November 2020, the central bank’s Monetary Council has maintained an accommodative monetary policy by keeping the benchmark interest rate at a historic low of 2% to allow the country to recover. completely from the pandemic-induced pandemic. recession.

BSP Governor Benjamin Diokno hinted that the central bank should keep interest rates unchanged at its May 19 meeting and pull the trigger on June 23.

“Notably, BSP’s policy messaging has recently taken a hawkish turn, with the governor opening the door to a rate hike in June,” Tan said.

ANZ Research is eyeing an aggressive cumulative rate hike of 125 basis points by the BSP that will take the overnight repo rate to 3.25% by the end of the year.

He also expects the central bank to make another 50 basis point rate hike next year, taking the benchmark rate to 3.75%.

Aris Dacanay, ASEAN economist at HSBC, said pressure for monetary tightening in the Philippines was growing as headline inflation accelerated to 4.9% in April.

“With the BSP policy rate still at its all-time low of 2% since November 20, 2020, pressure for monetary tightening is growing,” Dacanay said.

Dacanay added that last month’s increase was sharp and largely caused by global supply-side constraints, as oil prices are still high amid supply chain disruptions remain pervasive.

“The effects of the second round also seem to be felt. Prices for commodities that directly use oil, such as electricity, gas and transportation, have risen, but other commodities are following suit,” Dacanay said.

The British banking giant still expects inflation to rise further in the coming months as supply-side constraints are unlikely to disappear any time soon.

Dacanay explained that Indonesia’s recent palm oil export ban would directly affect food prices.

With inflation picking up further and the recent 50 basis point rate hike by the US Federal Reserve, Dacanay said the risk of BSP rate normalization before the third quarter has increased.