MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is widely expected to further bump up interest rates a global trend among central banks in the fight to ease soaring inflation with a 50-basis-point hike on its Thursday meeting.
Security Bank chief economist Robert Dan Roces said the Monetary Board may raise its key policy rates by 50 basis points on June 23 due to the larger size of the rate hikes by the US Federal Reserve and rising inflation expectations locally.
“A 50-basis-point bump in June will let the BSP balance growth recovery and manage inflation while getting ahead of the Fed’s pace. This should also help temper the peso’s weakness, with the current account deficit projected at $19.1 billion this year,” Roces said.
According to the dot-plot forecast released by the Fed following its 75-basis-point adjustment last June 15, the midpoint of the target range for the Fed funds rate would go to 3.4 percent.
The Security Bank economist said he sees inflation in the country averaging 4.5 percent, with scope to go higher on emerging risks from food and volatility from oil prices.
The bank now expects the BSP to raise interest rates by a cumulative 150 basis points instead of 100 basis points, with the benchmark rate ending the year at 3.50 percent from an all-time low of two percent.
Aside from the expected 50-basis-point hike on Thursday, Roces said the Monetary Board is seen further raising key policy rates by 25 basis points each in August, September and November.
“The economy has the capacity to absorb slightly higher interest rates, especially now that demand is almost back to pre-pandemic levels. Inflation and the currency’s weakness are significant headwinds to further recovery and as such the central bank may need to act forcefully this June,” Roces said.
China Bank chief economist Domini Velasquez is also convinced the BSP would deliver a more aggressive 50-basis-point rate hike given increasing inflationary pressures translating to secondary round effects.
“We are confident that demand recovery will continue to gain traction, and that the economy will be able to absorb higher interest rates this year. Moreover, the jumbo hike of the Fed earlier this week will possibly prompt the Monetary Board to fast-track its rate hiking cycle,” he said.
According to Velasquez, a wider interest rate differential with the Fed and other advanced economies would also help arrest the continued depreciation of the peso.
Alvin Arogo, economist at Philippine National Bank, said a 50 bps hike is more likely than 25 bps due to the US Fed hiking rates by 75 bps this month rather than 50 bps and the peso breaching the 53 to $1 level recently.
He said he expects the reverse repurchase rate to hit three percent by the end of the year, from a record low of two percent.
“However, this is currently under review and will likely be revised up given the more hawkish Fed. We will finalize our new projections after incorporating the updated monetary policy guidance that the BSP will provide on June 23,” Arogo said.
ING Bank senior economist Nicholas Mapa said the BSP would hike rates by 50 bps this week to keep up with the rate hike pack after the US Fed delivered its biggest hike since 1994.
“Accelerating inflation and decent robust growth translates to a faster pace of normalization. Getting back to pre-COVID levels of policy rate should be a directive,” Mapa said.
Union Bank chief economist Ruben Carlo Asuncion is expecting a follow up rate hike of 25 bps but is not discounting the possibility of more hikes in the coming months.
“We’re expecting the follow up rate hike of 25 bps. However, we think they will announce or allude to more hikes in the next coming meetings,” Asuncion said.
In its weekly brief, think tank Capital Economics joined the consensus for yet another rate hike, but has penciled in a 25 bps adjustment as against the 50 bps market consensus.
Last month, the BSP delivered its first rate hike in more than three years with 25 bps, bringing the benchmark rate to 2.25 percent from an all-time low of two percent.
Incoming BSP Governor Felipe Medalla has already signaled continuous rate hikes in the next two policy meetings to address inflation.
“The key concern for the central bank at the moment is rising inflation,” senior Asia economist Gareth Leather said.
Headline inflation soared to a three-and-a-half-year high of 5.4 percent in May as elevated oil prices spilled over to other commodities in the local consumer basket.
“However, we expect the policy rate to be tightened gradually. Growth is likely to slow due to a combination of higher commodity prices and weaker external demand,” Leather said.
He added that the recent jump in inflation should start to reverse soon as base effects become more favorable and growth slows.