Inflation uptick heightens likelihood of BSP rate hike

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said the quickening of inflation to 6.4 percent in July from 6.1 percent in June has increased the possibility of a 50-basis-point increase in interest rates this month.

In a virtual forum, BSP Governor Felipe Medalla told members of the Federation of Filipino Chinese Chambers of Commerce and Industry Inc. (FFCCCII) that there is a higher probability of a bigger rate hike on the scheduled rate-setting meeting on Aug. 18.

“Clearly that raises the probability rather than 25, but again, there are other (factors) that we will look at,” Medalla said.

Think tank Pantheon Macroeconomics also believes the higher inflation rate in July may lead to another rate hike this month.

“The punchier-than-expected print for July leaves the door open for yet another BSP rate hike this month, despite the Board’s huge out-of-cycle adjustment last month,” Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said.

The think tank said the central bank could keep interest rates steady based on the expectation the gross domestic product (GDP) growth in the second quarter would show a quarter-on-quarter contraction. The economy grew by 8.3 percent in the first quarter.

“For now, though, we’re keeping to our view that members will be forced into a pause at their next meeting in late August,” Chanco said.

The Philippine Statistics Authority (PSA) is set to release the second quarter economic performance on Aug. 9.

As part of policy normalization amid the hawkish US Federal Reserve, the BSP has delivered a total of 125 basis points in rate hikes, bringing the reverse repurchase rate to 3.25 percent from an all-time low of two percent to check rising inflationary pressures.

The central bank started its liftoff when it delivered its first rate hike in more than three years with a 25-basis-point rate hike on May 19 followed by another 25-basis-point increase on June 23.

To fight global spillovers, the BSP delivered a 75-basis-point rate increase during a surprise off-cycle rate-setting meeting last July 14.

Medalla has already ruled out the possibility of keeping interest rates unchanged on Aug. 18. Likewise, another huge 75-basis-point increase was also ruled out.

Medalla said monetary authorities would also consider other factors, particularly global oil prices.

“For instance, if the news tomorrow, say that OPEC oil prices have gone down to $80, of course, that’s wishful thinking. The   rate increase will be 25 (basis points) rather than 50 (basis points),” Medalla said.

Inflation averaged 4.7 percent in the first seven months, breaching the BSP’s two to four percent target, due to higher global oil prices and elevated food prices brought about by external developments such as the Russia-Ukraine war.

Medalla said inflation is set to breach the two to four percent target before easing back to within the range in 2023 and 2024.

Based on the latest assessment of the Monetary Board last June 23, the BSP raised its inflation forecasts to five   percent for this year and to 4.2   percent for next year. It also pegged the inflation projection for 2024 at 2024.

Medalla said the central bank is likely to lower its inflation forecasts for 2023, likely below four percent, and for 2024 due to the decline in global oil prices as well as the commitment of Russia and Ukraine for the continued exports of food to ensure steady global supply.

“Just remember that your BSP is looking at all   the variables and weighing them all carefully,” the BSP chief said.

Despite the tightening cycle, Medalla assured that the economic recovery would not be derailed.

Medalla, former Socioeconomic Planning Secretary and director general of the National Economic and Development Authority, said the country’s GDP may grow by seven percent this year, well within the 6.5 to 7.5 percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC).

Pantheon Macroeconomics sees average inflation accelerating to 4.8 percent this year from 3.9 percent last year, even as risks remain weighted on the upside.

“This turnaround should at least be picked up in the August report, resulting in the beginning of a sustained U-turn of the year-over-year rate. As we have been arguing over the past few weeks, this looming bout of oil-related disinflation is likely to be quite sharp, as transport inflation has exceeded significantly the actual change in global oil prices,” Chanco said.