Another rate hike looms next month  

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is not ruling out another rate hike in August after delivering an aggressive 75-basis-point interest rate increase on Thursday, the biggest in 20 years. In an interview with Bloomberg Television, BSP Governor Felipe Medalla said monetary authorities still have room to further raise interest rates next month depending on inflation.

“We will not rule out another hike in August, but of course the need to do a 50-basis-point increase is much, much less now,” Medalla said.

The BSP earlier signaled an increase of 50 basis points in the next rate-setting meeting of the Monetary Board on Aug. 18 after the peso breached the 56 to $1 level early this week.

In an off-cycle rate-setting meeting on Thursday, monetary authorities raised interest rates by 75 basis points, the biggest since the BSP adopted an inflation-targeting framework in early 2002 and since it shifted to an interest rate corridor (IRC) system in 2016, to help manage spillovers from other countries that could potentially disanchor inflation expectations.

Together with the back-to-back 25-basis-point interest rate hikes on May 19, the first in more than three years or since November 2018, and on June 23, the overnight reverse repurchase rate now stands at 3.25 percent from an all-time low of two percent.

Think tank Capital Economics said in a report that the BSP is likely to further raise interest rates to temper risks to the inflation outlook, with the policy rate seen at four percent by yearend.

In a report, Capital Economics said the BSP’s move to raise its benchmark policy rate by a further 75 basis points to 3.25 percent shows mounting concerns about inflation.

In addition, concerns about the pace of the US Federal Reserve’s tightening measures and the fall in the value of the peso, which has depreciated by nine percent against the dollar so far this year, are also seen as factors behind BSP’s rate hike.

“Further hikes seem likely, and we are changing our end-year forecast to four percent,” Capital Economics’ senior Asia economist Gareth Leather said.

Capital Economics’ previous year-end forecast for the main policy rate was at 3.25 percent.

Medalla said the off-cycle rate-setting meeting was not on the table, but had to be done to ease inflation back to within the BSP’s two to four-percent target by next year.

“What made us do it? Well of course, the basic reason is that the spillover effects from other countries are just too large,” Medalla said.

The BSP chief said the Bank of Canada raised its interest rates by 100 basis points, while the US Federal Reserve is likely to follow up its 75-basis-point hike on June 15 with another increase of 75 or 100 basis points later this month. “That, plus what we consider to be an overshooting in the forex (foreign exchange) market, which we did not like to add further to the inflation. If we do nothing, inflation next year could average 4.2 percent. So all those things together, we had to act,” Medalla said.

Based on the last assessment of the Monetary Board last June 23, the central bank raised its inflation forecasts to five percent for this year and to 4.2 percent for next year.

Inflation averaged 4.4 percent in the first half , exceeding the BSP’s two to four percent target range, after quickening to 6.1 percent in June from 5.4 percent in May.

Medalla said the Philippine economy could easily withstand the rate hike as the gross domestic product (GDP) expanded by 8.3 percent in the first quarter, fueled by the 10 percent growth in consumption and the 20 percent expansion in fixed-capital formation.

“We think the economy can easily withstand the hike because remember our current policy rate is still lower than the forecasted inflation rate next year. In that sense the real rate is still quite low,” Medalla said.

He said monetary authorities still have room to further raise interest rates.

“I think we still have room to raise the interest rates depending on the inflation picture. The key is to increase the chances that we will have below four percent inflation next year. Of course, I cannot guarantee that because of supply shocks, but we are trying to make that as likely as possible.”

While Capital Economics expects further rate hikes, it sees the tightening cycle to be short-lived.

“While inflation is likely to remain elevated for the next few months, it should peak soon. Energy price inflation should start to decline over the coming months as last year’s low base drops out of the annual comparison,” Leather said.

He said recent declines in global commodity prices are likewise seen to put downward pressure on inflation.

Capital Economics also expects slower economic growth to keep underlying price pressures low.

“Although the economy appears to have experienced a reopening boost in the second quarter, weaker global demand, tighter monetary policy and high commodity prices will cause growth to slow in the second half of the year,” Leather said. – Louella Desiderio