Economists expect BSP to hike rates by 25 bps

Philippine Tribune
Philippine Tribune

Lawrence Agcaoili – The Philippine Star

October 7, 2023 | 12:00am

Chutchotitham noted that BSP Governor Eli Remolona Jr. signaled a possible rate hike next month, which he said would not be the last. The BSP chief is also open for a possible off-cycle rate hike before the next rate-setting meeting.

STAR / Ernie Penaredondo

In November meeting

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to resume its tightening cycle by delivering a 25-basis-point hike next month as inflation quickened for the second straight month to hit a five-month high of 6.1 percent in September according to economists. Nalin Chutchotitham, economist for the Philippines at Citi, said the BSP is likely to raise key policy rates by 25 basis points (bps) to bring the benchmark rate to 6.50 percent during its next rate-setting meeting scheduled on Nov. 16.

“We now expect 25-basis-point rate hike to 6.50 percent at the November meeting, given large and persistent upside inflation surprise, as well as elevated inflation expectations. Food supply tightness remains a structural issue, while the peso depreciation and higher energy prices remain upside risks too,” Chutchotitham said.

Chutchotitham noted that BSP Governor Eli Remolona Jr. signaled a possible rate hike next month, which he said would not be the last. The BSP chief is also open for a possible off-cycle rate hike before the next rate-setting meeting.

The BSP’s estimated neutral rate is 3.8 percent, higher than Citi’s estimate of one to two percent.

Citi estimates real policy rate to be three percent in the fourth quarter of this year and next year, helping curb demand-pushed inflationary pressures.

Hence, Citi believes the BSP’s Monetary Board will take a gradual approach amid global uncertainties and growth slowdown.

However, Citi’s commodity research team expects Brent crude oil prices to ease toward an average of $82 per barrel in the fourth quarter and $74 per barrel in 2024.

“However, we note upside risks from supply side may potentially lead to one more 25 basis-point hike at the Dec. 14 meeting,” Chutchotitham said.

The global banking giant sees the BSP maintaining higher for longer rates until the first half of next year before slashing key policy rates by 125 basis points before the end of 2024.

“We maintain our view of no rate cut in the first half of next year and expect policy rate ending 2024 at 5.25 percent,” Chutchotitham said adding that Citi was earlier expecting the benchmark rate to settle at five percent by the end of next year.

Citi also raised its inflation forecasts to six percent from 5.6 percent for 2023 and to 3.4 percent from 3.1 percent for 2024 due to the higher-than-expected outturn in September.

“While September inflation’s surge was mainly from rice, and core goods and services’ inflation continued to ease, anchoring inflation expectations is likely to take precedence, as latest BSP consumer and business surveys, as well as market forecasts showed elevated inflation expectations for 2024 to 2025,” Chutchotitham said.

Headline inflation averaged 6.6 percent from January to September, way above the BSP’s two to four percent target range. It accelerated for two straight months after easing for six consecutive months to hit a year low of 4.7 percent in July from a peak of 8.7 percent last January.

Nomura’s Singapore-based economist for Southeast Asia Euben Paracuelles said the significant upside inflation surprise in September would likely now warrant a monetary response.

“We now forecast a 25-basis-point policy rate hike to 6.50 percent by the BSP at its meeting on Nov. 16 and push the start of its cutting cycle to May 2024 instead of March,” Paracuelles said.

Nomura also raised further its headline inflation forecasts to 6.2 percent from 5.9 percent for 2023 and to 3.8 percent from 3.6 percent for 2024.

Ayala-led Bank of the Philippine Islands (BPI) is also expecting the BSP to resume its tightening cycle after maintaining a hawkish pause as it kept interest rates steady since May this year amid the inflation downtrend and stable peso.

“We expect a rate hike from the BSP in its November meeting considering the latest developments. We also cannot rule out an inter-meeting hike, especially if the peso breaches the 57 to $1 level,” BPI lead economist Jun Neri said.

Neri pointed out that the risk of further peso depreciation is significant right now because of the recent behavior of oil prices and the surge in US yields.

According to Neri, inflation would likely stay above the four percent target of the BSP until the end of the year given the latest data.

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