100 bps rate hike not enough — economists

MANILA, Philippines — Economists are not convinced last week’s strong follow-through monetary action by the Bangko Sentral ng Pilipinas (BSP) via a rate hike of 50 basis points, the biggest in a decade, is enough to rein in rising inflation.

Shashank Mendiratta, economist at ANZ Bank, said the central bank’s Monetary Board may deliver another 25-basis-point rate hike as early as Sept. 27 as authorities have already bumped up their inflation forecasts for 2018 and 2019.

“The BSP also painted a sanguine picture on growth. On balance, the central bank has kept the door open for further rate hikes. We now forecast a further hike of 25 basis points to 4.25 percent at their September meeting,” Mendiratta said.

The BSP has so far raised interest rates by 100 basis points in three consecutive rate-setting meetings to curb rising inflation.

It lifted interest rates by 25 basis points for the first time in more than three years last May 10 followed by 25 basis points on June 20, and 50 basis points last Aug. 9.

The 50 basis point rate hike last Thursday was the biggest since July 2008. This brought the overnight reverse repurchase rate to four percent, the overnight deposit rate to 3.5 percent and the overnight lending rate to 4.5 percent.

The central bank raised its 2018 inflation forecasts to 4.9 and 3.7 next year. It also sees inflation at 3.2 percent in 2020.

The consumer price index hit a fresh five-year high of 5.7 percent in July from 5.6 percent in June, bringing the average to 4.5 percent in the first seven months, exceeding the BSP’s two to four percent target.

 “We believe that the central bank has kept the door appropriately open for further rate hikes,” Mendiratta said.

ING Bank Manila senior economist Joey Cuyegkeng said tightening would continue as inflation remains elevated and average 5.5 percent in the next five months.

“BSP is not done with raising rates. Inflation has still yet to peak, as implied by BSP’s upward revision of this year’s and next year’s inflation forecasts,” Cuyegkeng said.

Cuyegkeng said a further monetary tightening is needed to ensure that inflation expectations become well anchored.

 “We expect another 25-basis point rate hike in the fourth quarter and another 50 basis points in 2019,” Cuyegkeng said.

The economist explained monetary tightening would also eventually moderate imports and improve the contribution of trade in gross domestic product (GDP).

“BSP’s hawkish actions and bias also address weakness in the peso, which has contributed to inflationary pressures. The peso is the third-worst performer among Asian currencies so far this year,” Cuyegkeng said.

Euben Paracuelles, economist at Nomura Securities Co. Ltd., also expects the BSP to further raise interest rates by another 50 basis points for the rest of the year to anchor inflation expectations.