Economists see one more rate hike in Q4

MANILA, Philippines — Private economists expect the Bangko Sentral ng Pilipinas (BSP) to continue with its tightening episode as the 150-basis-point rate hike is not enough to curb rising inflationary expectations.

Benjamin Shatil, regional economist at J.P. Morgan, said the BSP’s Monetary Board is expected to further raise interest rates by another 25 basis points in the fourth quarter of the year as the outlook for the consumer price index (CPI) remains tilted to the upside.

“We expect a further 25 bps hike next quarter, with the risk of more tightening, should CPI inflation continue to rise through the fourth quarter amid upside risks to the outlook for energy and food prices,” Shatil said.

Shatil added the BSP was clear in citing a persistent, broader, and sharper-than-expected acceleration in CPI inflation as the catalyst for the second consecutive 50-basis point hike.

After delivering its first back-to-back 50-basis point rate hike since shifting to the inflation targeting framework in 2001, the BSP’s Monetary Board also raised its inflation forecasts to 5.2 instead of 4.9 percent this year and to 4.3 instead of 3.7 percent next year, both higher than the central bank’s two to four percent target.

“The ongoing combination of firm demand, broadening price pressures, and thinning external buffers suggests that policy will retain a firmly hawkish bias,” Shatil said.

The BSP has raised the benchmark overnight reverse repurchase rate to 4.5 percent from three percent to keep inflation expectations well anchored. It lifted rates by 25 basis points for the first time in more than three years last May 10, followed by 25 basis points last June 20, 50 basis points last Aug. 9, and 50 basis points last Sept. 27.

ING Bank senior economist Nicholas Mapa said the central bank is set to further tighten the monetary conditions in the country as inflation is seen exceeding the BSP target until next year.

“Although inflation is expected to slow down in the fourth quarter, the BSP may still be called to enact another round of rate hikes as inflation expectation remain elevated going into 2019,” Mapa said.

Inflation averaged 4.8 percent in the first eight months of the year after leaping to a fresh nine-year high of 6.4 percent in August from 5.7 percent in July amid higher oil and food prices, weak peso, and the impact of the tax reform law.

The BSP said September inflation would range from 6.3 to 7.1 percent and likely settle at around 6.8 percent, another fresh nine-year high of due to higher oil prices and more expensive rice and agricultural commodities due to the onslaught of super typhoon Ompong.

Barring any additional calamities, Mapa added inflation would revert within the BSP’s two to four percent target in the latter half of next year.

Fitch Solutions Macro Research also expects the BSP to hike policy interest rates again by another 25 basis points before the end of the year and by another 75 basis points next year.

“Our view is informed by the BSP’s upward shift in its baseline inflation forecast (unspecified) and its continued hawkish tone in its monetary statement, stating that it will take all necessary policy actions to address the threat of high inflation,” Fitch Solutions said.

HSBC economist Noelan Arbis said the bank sees another 25-basis point rate hike in the first quarter of next year as the second tranche of excise tax increases under Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law takes effect in January.

“The 150 basis points of rate hikes this year should help curb second-round impacts to inflation, but non-monetary measures remain necessary. We expect another 25bp hike in the first quarter of 2019 and inflation to remain above-target in 2019 unless key reforms to curb prices are passed,” Arbis said.