Moody’s unit sees BSP hiking rates by 50 basis points

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is seen delivering another aggressive 50-basis-point rate hike on Thursday as core inflation continues to accelerate in August, according to Moody’s Analytics.

Although headline inflation moderated slightly to 6.3 percent in August from 6.4 percent in July, the research arm of the Moody’s Group said core inflation, which excludes the volatile food and energy prices, quickened to 4.6 percent year-on-year.

Inflation averaged 4.9 percent from January to August, exceeding the two to four percent target set by the BSP.

“The BSP is expected to raise its overnight reverse repurchase rate by 50 basis points to 4.25 percent,” Moody’s Analytics said in its latest weekly highlights and views.

Based on its latest assessment, the Monetary Board now expects inflation to average 5.4 percent instead of five percent this year. However, it lowered its projections to four percent instead of 4.2 percent for 2023 and to 3.2 percent instead of 3.3 percent for 2024.

The central bank has so far raised interest rates by 175 basis points, bringing the benchmark rate to 3.75 percent, from an all-time low of two percent, to curb rising inflationary pressures and stabilize the peso that has hit record lows.

The soaring consumer prices and weakening local currency prompted the BSP to deliver a huge
75-basis-point rate increase in an off-cycle rate setting meeting on July 14, followed by another 50-basis-point hike on Aug. 18.

Economists widely expect the BSP to raise interest rates by another 50 basis points on Sept. 22 as the US Federal Reserve is seen delivering another huge rate hike this week to address inflation.

Moody’s Analytics said the Philippine economy is strong enough to absorb further tightening as the gross domestic product (GDP) expanded by 7.8 percent in the first half.

The Philippines exited the pandemic-induced recession with a GDP growth of 5.7 percent last year after contracting by 9.6 percent in 2020 as the economy stalled amid strict COVID quarantine and lockdown protocols.

With the continued reopening of the economy, the GDP expansion in the first half exceeded the lowered 6.5 to 7.5 percent target set by the Cabinet-Level Development Budget Coordination Committee (DBCC).

With soaring inflation affecting consumption, the expansion slowed to 7.4 percent in the second quarter from 8.2 percent in the first quarter.

“Strong GDP growth, a product of improving domestic demand, gives BSP the space to tighten monetary policy,” Moody’s Analytics said.