January 31, 2023

Filipino Guardian

Sentinels of Filipino Free Press

BSP delivers jumbo rate hike again

The Philippine central bank raised its median inflation forecast for 2022 to 5.8% from the previous 5.4%. — PHILIPPINE STAR/ EDD GUMBAN

By Keisha B. Ta-asan, reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) raised interest rates for the sixth time this year on Thursday to tame inflation, which is now expected to rise to 5.8% by year-end.

As cabled by BSP Gov. Felipe M. Medalla earlier this month, the Monetary Board increased the overnight reverse repo rate by 75 basis points (bps) to 5%, the highest in almost 14 years.

The move followed the US Federal Reserve’s 75 basis point hike at its November 1-2 meeting, which took interest rates to between 3.75% and 4%.

BSP interest rates on overnight and credit facilities were also raised to 4.5% and 5.5% respectively.

“When deciding to raise interest rates again, monetarism noted that core inflation rose sharply in October, suggesting greater pass-through of elevated food and energy prices, as well as demand-side stimulus to inflation,” Mr Medalla said.

Headline inflation accelerated from 6.9% in September and 4% a year earlier to a nearly 14-year high of 7.7% in October.

Core inflation, which includes food and fuel prices, accelerated to 5.9% in October from September’s revised 5%.

The BSP also raised its average inflation forecast for this year to 5.8% from 5.4%. For the next year, the BSP raised the inflation forecast from 4.1% to 4.3%. These forecasts are still above the central bank’s target of 2% to 4%.

The inflation forecast for 2024 was also raised from 3% to 3.1%.

“Risks to the inflation outlook are trending sharply to the upside into 2023, while remaining broadly balanced in 2024. Upside risks are associated with increased international food prices due to higher fertilizer costs, trade restrictions and unfavorable weather conditions,” said Mr. Medalla.

He also cited supply disruptions, agricultural damage from typhoons and possible fare hikes as factors that could fuel inflation.

Dennis D. Lapid, director of the BSP Department of Economic Research, said inflation is expected to average 5.8% this year as inflation peaks in the fourth quarter.

However, Mr. Medalla said he does not see inflation exceeding 8% in November or December.

“Even if that is the case, next year it will start to go down. Our own forecast is that inflation will actually be 3% rather than 4% in the second half of next year, assuming of course there are no new supply shocks,” he said.

Mr Medalla said the Monetary Board saw the need for aggressive tightening to “ensure price stability” amid the possibility of further second-round effects, persistent inflationary pressures and upside risks to the inflation outlook.

“With strong economic growth in the third quarter of 2022, domestic demand is expected to remain stable on improved employment outcomes, investment activity and consumer spending,” he said.

The Philippine economy grew 7.6% in the third quarter, bringing the average year-to-date growth to 7.7%. Economic managers expect full-year GDP growth to settle within 6.5-7.5%.

“A sizeable interest rate adjustment will help shield the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially crowd out inflation expectations,” Mr Medalla said.

Following the BSP announcement, the Philippine peso closed at P57.36 against the US dollar, little changed from its close of P57.35 on Wednesday. Year to date, the peso has weakened P6.36, or 11.1%, from its close of P51 on December 31, 2021.

Asked whether GNP would continue to reflect Fed tightening in the coming months, Mr Medalla said future policy action would be data dependent.

“The Fed rate is not the highest now, but the four 75-bp [rate increases] were the [fastest] for a long time and I think that’s over. As such, we are slowly returning to a more normal global rate environment,” he said.

“We will likely be doing less of the BSP’s two recent unusual actions, namely the off-cycle 75 (bps) and this 75 (bps) announced two weeks earlier,” he added.

The central bank has hiked rates by a total of 300 basis points this year.

Following the policy announcement, economists expect another rate hike at the December 17 Monetary Board meeting.

“Given ongoing inflationary pressures, we expect an additional 50 basis points from December GNP to match the Fed’s move. Stronger-than-expected Q3 GDP numbers also give some comfort to GNP in its position that the economy is resilient enough to weather tightening policies,” said Makoto Tsuchiya, assistant economist at Oxford Economics, in one Note.

However, Mr Tsuchiya said a looming recession in developed countries, high inflation, tightening global financial conditions and a slowdown in China are clouding the Philippines’ outlook.

“GDP is likely to keep its hawkish tone given the recent revision of inflation forecasts for 2022 and 2023,” said Nicholas Antonio T. Mapa, senior economist at ING Bank NV Manila, adding that he also expects a 50 basis point hike in December .

Gareth Leather, senior Asia economist at Capital Economics, said the BSP could halt rate hikes in early 2023.

“We think further tightening is likely in the near term, but with inflation likely to have peaked, headwinds to the recovery will increase and the Fed’s tightening cycle is likely to come to an end soon,” Mr Leather said in a note.

He said further peso weakness is likely to be over in the next few months, and he expects the peso to appreciate against the US dollar by the second half of 2023.

“Overall, we expect another 50 basis point rate hike at the BSP’s last meeting of the year in December, followed by another hike in early 2023, which should mark the end of the central bank’s tightening cycle,” he added.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said BSP should be cautious in its inflation assessment and monetary tightening.

“Any further rate hike from these levels would be tantamount to overkill, not least because the path to target range inflation remains clear until the middle of next year. We strongly disagree with the board’s assessment that the recent spike in core inflation is worth paying attention to as the Philippine gauge of underlying inflation still includes some volatile food and energy components,” he said.

“Overall, we stand by our call to aim for a partial reversal of this year’s rate hikes towards the end of 2023.”