BSP seen to raise key rate by 75 bps

MANILA, Philippines — Ayala-led Bank of the Philippine Islands (BPI) expects the Bangko Sentral ng Pilipinas (BSP) to  revert to a tightening cycle and deliver a total of 75 basis points in interest rate hikes as early as the middle of the year.

Aside from inflation risks, the 170-year-old bank said the US Federal Reserve is another factor that could push the BSP to hike key policy rates.

“We continue to expect a 75-bps adjustment in the policy rate this year from two percent to 2.75 percent,” BPI said in its latest data alert after inflation for the month of February surprisingly remained steady at three percent.

The listed bank expects favorable base effects particularly in food to keep the headline print muted though March.

However, BPI noted that upside risks to inflation had built up due to recent global price developments and this could eventually spill over to food products.

Global oil prices have breached the $100 threshold amid the Russia-Ukraine war and major global oil producers have not expressed any intention to ramp up their production despite the pressure from the West.

BPI warned that a prolonged period of elevated oil prices could push inflation close to the two to four percent target of the BSP. With mobility at pre-pandemic level, transportation groups have more bargaining power to request for fare adjustments.

“The possibility of inflation breaching the four percent may increase further if oil prices remain elevated above $100,” BPI said.

Furthermore, it said  the price of other commodities like fertilizer, coal, wheat, and corn had also increased due to the conflict in Europe.

Russia and Ukraine are major exporters of these commodities, accounting for 10 to 20 percent of global production.

BPI said the conflict could restrict the supply of these commodities, adding up to the country’s inflation risks.

“We are maintaining our full year forecast at 3.8 percent for now, but actual print could breach four percent if upward pressure on commodity prices doesn’t ease soon,” BPI said.

After aggressively slashing interest rates by 200 basis points in 2020 as part of its COVID-19 response measures, the BSP has kept a loose and expansionary monetary policy stance by maintaining the benchmark rate at a record low of two percent since November 2020.

BPI said the central bank’s Monetary Board has kept the real policy rate in negative territory for 17 straight months.

The increase in oil prices may also lead to a bigger depreciation of the peso since it will expand the country’s import bill further, BPI said.

“Aside from this, the peso is expected to weaken in the coming months due to import expansion amid the recovery of demand. With the country becoming more reliant on imported food products like pork and fish, the retail price of these commodities will likely increase due to peso depreciation,” it pointed out.

BPI also cited that shipping costs worldwide had increased significantly in the past two years due to global supply chain issues amid the pandemic. while logistics companies have not been able to adjust their capacity amid the boom in imports and exports.

“Substantial peso depreciation due to import expansion and hawkish Fed policy might force the central bank to make sizable adjustments in their policy settings in mid-2022 as the likelihood of a rate hike in the first half is low amid the campaign season,” BPI said.