UK think tank sees easing cycle in late 2023
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may deliver more but less aggressive interest rate hikes after delivering a cumulative 300-basis-point rate increase so far this year to anchor inflation expectations and temper downward pressures on the peso, economists said. In a report, DBS Bank economist Chua Han Teng said further tightening is expected from the still-hawkish BSP even after 300 basis points worth of rate hikes since May.
On Thursday, the BSP delivered an aggressive 75-basis-point hike, bringing the overnight reverse repurchase rate to a 14-year high of five percent, the highest since the 5.5 percent in December 2008.
“In our view, additional BSP monetary tightening is in the pipeline given the context of high and above-target inflation, albeit at a less aggressive pace in the subsequent meetings,” Teng said.
The BSP started its interest rate liftoff with a 25-basis-point hike on May 19, followed by another 25 basis points on June 23 and a huge 75 basis points during a surprise off-cycle rate-setting meeting on July 14.
Prior to Thursday’s jumbo rate hike, the BSP also raised key policy rates by 50 basis points on Aug. 19, followed by another 50 basis points on Sept. 22.
The BSP has committed to match the aggressive rate hikes delivered by the US Federal Reserve point by point to maintain an interest rate differential of 100 basis points.
The Singapore-based bank sees the BSP tightening cycle to extend until next year, with the benchmark interest rate hitting six percent by the first quarter of 2023.
UK-based think tank Pantheon Macroeconomics, meanwhile, sees the BSP cutting interest rates late next year after the expected smaller hike in key policy rates next month.
“This month should mark the peak in the size of rate adjustments,” Pantheon Macroeconomics emerging Asia economist Miguel Chanco said in a report.
As the BSP also hiked its inflation forecasts further, Chanco said it is expected there would be at least one more rate hike this year.
He said the BSP is likely to downshift to a 50-basis-point increase at its December meeting.
Sanjay Mathur and Debalika Sarkar of ANZ Research said the aggressive monetary policy response of the BSP has been attributed to the latest inflationary concerns and its second-round impact that could lead to a further disanchoring of inflation expectations.
“Despite the cumulative 300-basis-point rate hikes since May 2022, the central bank believes that monetary policy is in neutral zone and not restrictive to growth. It also expects the economy to operate above potential in 2023, but the output gap will eventually return to neutral in 2024 as the impact of policy tightening fully feeds through,” Mathur and Sarkar said.
According to ANZ, the BSP noted that inflation expectations are also highly susceptible to currency movements and therefore a wide differential with the US Fed funds rate was necessary to manage the foreign exchange volatility.
ANZ sees the BSP further raising key policy rates by 25 basis points next month and by another 50 basis points in the first quarter of next year.
Jun Neri, lead economist at Bank of the Philippine Islands (BPI), said the robust gross domestic product (GDP) growth gives the BSP more room to hike policy rates.
The economy grew by 7.7 percent from January to September, faster than the 6.5 to 7.5 percent target penned by economic managers, after a stronger-than-expected 7.6 percent expansion in the third quarter.
“This gives the BSP enough space to continue hiking the policy rate, probably even up to six percent. Pent-up demand remains strong as indicated by the third quarter GDP and may persist until next year since spending on certain items like hotels, restaurants, and recreation is still below the pre-pandemic level,” Neri said.
Neri said the number one risk affecting the economy is inflation
However, he said the direction of interest rates could change in the second half of 2023, depending on what the Fed would do, as recession could prompt the US central bank to bring down the Fed funds rate closer to three percent.
“In this scenario, the BSP policy rate might peak at around 6.5 percent in 2023. The BSP will likely deliver its own cuts following the Fed, but still maintaining the 100 to 200 basis points differential with US rates. The BSP policy rate could go down to four percent in the latter part of 2023 if this happens,” Neri said. – Louella Desiderio