Market analysts and observers are already factoring in at least one more policy rate hike by the Bangko Sentral ng Pilipinas (BSP) in November.
Ayala-led Bank of the Philippine Islands (BPI) in a commentary said that with a higher 6.1 percent inflation in September versus August’s 5.3 percent, a rate hike on Nov. 16 which is the next Monetary Board policy meeting, and an off-cycle adjustment to the key rate is highly probable.
“We expect a rate hike from the BSP in its November meeting considering the latest developments,” said BPI.
The bank’s analysts said if the peso vis-à-vis the US dollar breaches P57 – “we cannot rule out an inter-meeting hike” since “the risk of further peso depreciation is significant right now because of the recent behavior of oil prices and the surge in US yields.”
It added, “depreciation pressure on the peso may persist as market players weigh substantial imports, global financial market developments, and the central banks’ future policy move.”
BPI said however that remittances during the holidays – traditionally hefty – could offset some of the pressure on the local currency. “But the behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. Once the Fed is done hiking, the peso may strengthen as markets will likely assess the possibility of rate cuts.”
But, the bank adds, “if a recession in the US happens, the Fed may cut its rates and the BSP will likely follow. But in this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the still substantial current account deficit of the Philippines this year and in 2024.”
Meanwhile, BPI said inflation will not slowdown just as yet and could remain above-target of four percent until end-2023. The government has an inflation target of two percent to four percent until 2025.
The bank said rice will dictate where inflation will be in the next six months.
“If rice prices stay at current levels, the year-on-year increase in rice prices will be double digit until July 2024, which will contribute 1.5% to headline inflation. Even in an optimistic scenario where the price of rice goes down by 0.5% month-on-month, the year-on-year increase will still be double digit until May 2024,” noted BPI.
It also said that based on historical experience, it takes many months for rice inflation to go back to four percent whenever there is a shortage in supply. Citing 2008, 2014, and 2018 as example, the bank said rice inflation went back to four percent after 21 months, 18 months, and 9 months respectively. “It seems the current situation is more similar to the 2008 episode,” it added.
On the other hand, core inflation has slowed down further, it further noted. “But this might reverse again in the coming months (while) second round effects might be forming again, especially given the recent approval of the fare increase for jeepneys.”
The BSP in its own commentary on the day the 6.1 percent year-on-year September consumer price index (CPI) was released, said that by contrast, core inflation which excludes selected volatile food and energy items to measure underlying price pressures, eased further to 5.9 percent from 6.1 percent in August.
The year-to-date average inflation remains above-target at 6.6 percent.
“Inflation rose in September due largely to the increase in prices of heavily weighted food and non-alcoholic beverages. Some tightness in domestic supply conditions linked to recent weather disturbances resulted in higher prices of some food items, particularly rice, meat, and fruits. Meanwhile, upward adjustments in domestic petroleum prices translated to higher transport inflation, contributing to the rise in non-food inflation for the month,” said BSP.
It added that the “latest data suggests that inflation is likely to remain elevated in the coming months due to the continued impact of supply shocks on food prices and the rise in global oil prices. By the fourth quarter this year, the BSP still believes CPI will be back to the target range “in the absence of further supply shocks.”
Since inflation is still elevated, BSP Governor Eli M. Remolona Jr. has already signaled that there will be at least two policy rate hikes before the year ends.
The target reverse repurchase rate or the key rate is currently on hold at 6.25 percent. Remolona has also said that an off-cycle rate hike is possible, given the increase in CPI in August and September.