The Monetary Board of the Bangko Sentral ng Pilipinas (BSP), Philippines central bank raised its benchmark interest rate by 25 basis points and hinted at further hikes to contain surging inflation following an emergency meeting on Thursday, lifting the key rate to 6.5%. The move came after inflation accelerated to 6.1% year-on-year in September as food prices rose. It is the highest since the 7.50 percent logged in May 2007. Since it started raising interest rates in May last year, the BSP has so far increased key policy rates by 450 basis points (bps), making it the most aggressive central bank in the region.
BSP Governor Eli Remolona Jr. said that another rate rise is on the table if the [inflation] situation gets worse. He added that “we’re hoping data are nicer to us, if not then we will have to consider a further rate hike.”
Today’s decision came after an extended BSP “prudent pause” at the last three meetings. BSP had expected inflation to settle within its target band as early as September, although the central bank did indicate that risks to the inflation outlook remain tilted to the upside.
“We expect the policy rate to be held unchanged for the remainder of the year, with odds of further tightening back on the table if the US Fed follows-through with a hike in Septeber and October,” Economist Rao said back in August.
Inflation
The BSP said inflation will stay elevated until next year, noting “inflation expectations have risen sharply,” highlighting the risk of knock-on effects.
Remolona said price growth will moderate to 3% after July next year, while adding that he expects inflation to stay above the central bank’s inflation target of 2-4% throughout the first half of 2024.
The price of rice climbed 17.9% in September. The staple became more expensive despite Philippine President Ferdinand Marcos Jr.’s decision to impose a price ceiling, which experts warned could cause price distortions.
Bank of the Philippine Islands lead economist Jun Neri said in the past supply remains the major source of inflation.
Supply Shock Risk
“The supply shocks can have their effects on expectations. And so we try to moderate those shocks by working on the demand side for the same commodities and for a broader range of commodities. So it’s a balancing act. We try to figure out how strong the lagged effects are and how expectations are evolving,” Remolona said in the past.
Growth
Despite Thursday’s “surprise” move, Remolona said he doesn’t want “tight monetary policy to affect our growth prospects.”
Gross domestic product moderated to 4.3% in the second quarter, the slowest in 12 years, as high interest rates and rising inflation took a toll on the economy.
The Asian Development Bank lowered the country’s growth prospects to 5.7% from 6% in its latest report, reflecting similar concerns.
Peso
DBS Bank senior economist Radhika Rao said the post-decision commentary of the BSP governor was geared toward highlighting pipeline risks, including the recent climb in global energy and food prices, particularly rice, as well as domestic catalysts like transport costs, minimum wage increases, utilities and a weaker peso.
“Against this backdrop, the governor reiterated his readiness to hike rates anew if the data so warranted,” Rao said.
Deputy Gov. Dakila has signaled in the past that the central bank could intervene to support the peso,
“The [central bank] stands ready to participate in the foreign exchange market only to ensure orderly market conditions and to reduce excessive short-term volatility in the exchange rate,” he has said.
Dakila in a previous interview said the potential impact of higher global oil prices, petitions for further transport fare hikes, weather disturbances affecting food prices, and a sharp increase in the price of sugar all remain. He said the latest rate hike should “help alleviate some pressures” on the peso, even though the increase is smaller than the U.S. Fed’s latest adjustment.
In the past BMI, a unit of Fitch Solutions cautioned the Philippine central bank on the timing of cutting policy rates.
In a commentary in August following the announcement of the Monetary Board on Thursday to maintain policy rates, BMI said rate cuts should be considered only when food prices have already stabilized.
Likewise, BMI added that the Bangko Sentral ng Pilipinas (BSP) should only continue with interest rate reductions when major central banks across the world have also eased their monetary policy, which is seen to be happening by the second quarter next year.
“With clear risk to inflation outlook and the external sector under pressure, policymakers will likely keep financial conditions very restrictive for a while longer. This feeds into our expectations for rate cuts to materialize only in Q2 2024,” BMI noted.
BMI’s inflation forecast for the country is at 4 percent by the end of 2023.
However, risks to inflation remain high with the onset of El Niño, which is seen to intensify between the fourth quarter of 2023 and the first quarter of 2024, which could threaten food prices.
The depreciating peso is also seen to be a risk to inflation as the country is a net importer.
The peso has already weakened by 1.9 percent against the US dollar year-to-date.
“Policymakers will be cautious about exacerbating further weakness in the peso, especially given that the US Federal Reserve has not completely closed the door on further tightening–a key risk that we have been highlighting,” BMI said.
From The TradersCommunity Research Desk