Foreign banks see BSP raising rates

MANILA, Philippines — Foreign banks are expecting the Bangko Sentral ng Pilipinas (BSP) to start lifting interest rates tomorrow on the back of quickening inflation as well as the faster-than-anticipated gross domestic product (GDP) growth in the first quarter.

Jonathan Koh, economist for Asia and the Philippines at Standard Chartered Bank, said the Monetary Board is likely to deliver a 25-basis-point rate hike on May 19, bringing the overnight borrowing rate to 2.25 percent from an all-time low of two percent.

“The economy recovered strongly in the first quarter to return above pre-pandemic levels and the recovery was broad-based as well. The labor market has also continued to improve, with the unemployment rate falling to 5.8 percent in March, the lowest since the start of the pandemic. This should support private consumption going forward,” Koh said.

The country’s GDP expanded by 8.3 percent in the first quarter, versus the market expectation of 6.7 percent from a 7.8 percent growth in the fourth quarter and 3.8 percent contraction in the first quarter last year.

The feat was achieved even if the National Capital Region (NCR) and nearby areas were placed under Alert Level 3 in January as COVID cases spread rapidly due to the Omicron variant.

“A narrowing of the negative output gap (we expect it to turn positive in the fourth quarter) and less slack in the labor market may allow the pass-through of higher costs to consumers and a broadening of inflationary pressures,” Koh said.

Inflation quickened to 4.9 percent in April, the highest in more than three years from four percent in March due to soaring global oil prices and elevated food prices. This was higher than the BSP’s two to four percent target range.

 “We expect the BSP to begin policy normalization in May to arrest potential second-round inflationary effects,” Koh said.

HSBC economist for ASEAN Aris Dacanay is expecting a back-to-back rate hikes by the Monetary Board to pre-empt potential inflation and capital outflows, in line with the tightening cycle by other central banks led by the US Federal Reserve.

Dacanay said the Philippine economy is beginning to look like it was before the COVID-19 pandemic began, delivering an 8.3 percent GDP expansion in the first quarter, providing a good opportunity for the BSP to address inflation by normalizing its monetary policy.

“Our current expectation is that the first 25-basis-point rate hike will be done as early as the May 19  Monetary Board meeting, followed by another 25-basis-point hike in June,” Dacanay said.

The British banking giant is anticipating a 50- basis-point rate hike in the third quarter and another 50 basis points until the third quarter of 2023, bringing the benchmark rate to four percent.

On the other hand, Nomura economists Euben Paracuelles and Rangga Cipta see possible risks if the BSP delivers its first rate hike earlier than its fourth quarter target given less dovish BSP comments after the latest inflation results.

Nomura is only expecting one 25 basis points hike this year followed by 125 basis points next year that would bring the overnight borrowing rate to 3.50 percent by the third quarter of next year.

The Japanese investment bank sees inflation accelerating to 4.6 percent this year, exceeding the two to four percent target set by the BSP.