Further rate hikes seen this year

MANILA, Philippines — The stronger-than-target economic growth last year gives the Bangko Sentral ng Pilipinas (BSP) more space to further tighten its policy this year as inflation remains well above the government’s two to four percent target range, according to economists.

ING Bank senior economist Nicholas Mapa said the BSP has more elbow room to raise key policy rates further in the first semester due to the above-consensus 7.6 percent gross domestic product (GDP) growth in 2022.

The expansion was slightly higher than the 6.5 to 7.5 percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC) for 2022.

“The above-consensus GDP growth in 2022 should give the BSP space to tighten policy further in the first half of 2023. Inflation, although close to peak, remains well above target and could prove to be sticky over the coming months,” Mapa said in a commentary.

As revenge spending extended into the Christmas holidays, Mapa said the Philippines booked a faster-than-anticipated GDP growth of 7.2 percent in the fourth quarter of last year. The economy expanded by 7.6 percent in the third quarter of 2022.

“Although the fourth quarter GDP growth was impressive, we believe that momentum could finally moderate this year amid a challenging environment of still elevated inflation, rising borrowing costs and tight fiscal space,” Mapa said.

The BSP hiked key policy rates by 350 basis points to a 14-year high of 5.50 percent from an all-time low of two percent to tame inflation and stabilize the peso.

The peso slumped by as much as 15.7 percent, hitting a record low of 59 to $1 in October last year.

However, due to the series of aggressive rate hikes and active participation in the foreign exchange market by the BSP to smoothen volatility, the peso has since rebounded back to the 54 to $1 range.

“The peso has largely tracked the moves of regional peers and is up 2.4 percent for the year. The peso may benefit from the upside surprise in growth,” Mapa said.

Inflation, on the other hand, accelerated to 5.8 percent last year from 3.9 percent in 2021 as it quickened to a 14-year high of 8.1 percent in December from eight percent in November.

Mapa said the BSP would continue to take its lead from moves by the US Federal Reserve.

“Rapid-fire rate hikes may have already begun to impact capital formation, which posted the slowest growth this year. Just like for most other ASEAN central banks, we believe that the current rate hike cycle could be coming to an end soon, with the BSP likely taking its lead from moves by the FOMC (Federal Open Market Committee),” he said.

HSBC economist for ASEAN Aris Dacanay said the BSP may further raise interest rates by another 75 basis points this year to re-anchor inflation expectations.

“In terms of monetary policy, the high growth print in the fourth quarter of last year increases the likelihood that the BSP will raise rates further to ensure inflation expectations are sufficiently well anchored. We maintain our view that the BSP will continue to raise rates until pausing at 6.25 percent,” Dacanay said.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands (BPI), said the strong GDP number last year gives monetary authorities space to raise key policy rates further.

“Given the strong GDP number, the BSP has the space to adjust its policy rate further and continue the fight against inflation. In case they decide to pause hiking, the strong GDP print gives them the chance to keep interest rates steady at elevated levels while building up their gross international reserves again,” he said.