‘BSP not yet done with rate hikes’

MANILA, Philippines — Economists believe the Bangko Sentral ng Pilipinas (BSP) is not yet done with its tightening cycle despite a downshift to a smaller 25-basis-point hike last Thursday.

HSBC economist for ASEAN Aris Dacanay said in a commentary that the central bank’s Monetary Board could even push its benchmark interest rate higher than 6.50 percent if the consumer price index (CPI) rises further.

“However, if core CPI rises further than expected, there is a risk that the BSP will push interest rates higher than 6.50 percent,” Dacanay said.

The BSP has raised key policy rates by 425 basis-points since its tightening cycle began last May. This brought the overnight reverse repurchase rate to an fresh 16-year high of 6.25 percent, the highest since the 7.50 percent in May 2007.

Monetary authorities however dialed down the cycle with a smaller 25-basis-point hike last Thursday, the same level of increase implemented by the US Federal Reserve.

According to Dacanay, the BSP has raised interest rates over the past seven consecutive rate-setting meetings as core inflation accelerated to a 24-month high of 7.8 percent in February from 7.4 percent in January despite the slight easing of headline inflation to 8.6 percent from 8.7 percent.

“Despite increasing risks of global financial conditions tightening and that headline inflation was slightly easing in February, the BSP continued its tightening cycle but at a more gradual pace,” Dacanay added.

The British banking giant sees the central bank delivering another 25-basis-point hike during its next rate-setting meeting scheduled on May 18.

This, Dacanay said, could be the last rate hike before the BSP pauses.

“We argued previously that the crux for monetary policy moving forward will be core CPI. And we think core CPI can still be punchy in March and April given that its momentum hasn’t shown any signs of letting up. Since core inflation is still elevated, there is still a risk that price pressures will continue to spill over to other commodity items,” the economist said.

According to Dacanay, the BSP remains hawkish and signaled that further monetary tightening is more likely cognizant of the recent risks in the global financial system after the collapse of Silicon Valley Bank (SVB) and Signature Bank in the US as well as the crisis being faced by Credit Suisse in Europe.

“Nonetheless, interest rate risk and the risk of contagion are minimal for now but not necessarily zero. Like the US, the Philippines has raised rates aggressively in such a short span of time. There is still some liquidity in the system to flush out but any signs that financial conditions are tightening quicker than warranted can prompt the BSP to pause its hiking cycle earlier than we expect,” Dacanay added.

Jun Neri, lead economist at Bank of the Philippine Islands, said the tightening cycle could continue in the first half of the year amid the gradual decline in inflation prints.

Neri said that inflation in March should fall below eight percent to increase the chances of the CPI falling within the BSP’s two to four percent target band by November of December this year.

“The BSP may need to continue hiking interest rates in the first half of the year considering the inflation outlook. Inflation story may become favorable in the second half of the year, barring any global commodity price shocks and provided that non-monetary measures prove effective in normalizing food supply situation in the country,” Neri said.

According to Neri, the BSP may also consider cutting the reserve requirement ratio (RRR) by as much as 400 basis points to offset the lifting of the small and medium enterprises RRR and to ease domestic financial conditions.

Euben Paracuelles and Rangga Cipta of Nomura Securities Ltd. also forecast more rate hikes to anchor inflation expectations as core inflation continued to rise despite a modest decline in headline inflation last month.

Although the BSP decided to deliver a more measured 25-basis-point increase last Thursday after delivering back-to-back 50-basis point hikes in December and February, Paracuelles and Cipta are expecting further tightening by the BSP.

“However, we believe BSP is not yet done, in contrast with its closest peer in ASEAN,” they said.

Paracuelles and Cipta said Bank Indonesia has already paused after hiking by a cumulative 225 basis points.