HSBC sees higher inflation, interest rate cut next year

MANILA, Philippines — British banking giant HSBC has raised its inflation forecasts for the next two years as it expects the Bangko Sentral ng Pilipinas (BSP) to deliver another 25-basis-point hike before the end of the year.

Fred Neumann, chief economist and co-head of global research for Asia at HSBC, said in a press conference it now expects inflation to average 5.9 percent, up from 5.5 percent, for 2023 and to 3.7 percent, up from 3.6 percent, for 2024.

Inflation averaged 6.6 percent, still well above the BSP’s two to four percent target range, after accelerating to 5.3 percent in August from 4.7 percent in July.

Headline inflation accelerated to 5.8 percent last year from 3.9 percent in 2021, exceeding the government’s target due to soaring oil and food prices.

On Sept. 21, the BSP’s Monetary Board hiked its inflation forecasts to 5.8 percent from 5.6 percent for 2023 and to 3.5 percent from 3.3 percent for 2024 due to the stronger-than-expected outturn in August, rising oil and food prices as well as the depreciation of the peso.

The BSP was the most aggressive central bank in the region after raising key policy rates by 425 basis points between May last year and March this year to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 in October 2022.

However, the inflation downtrend for six straight months from a peak of 8.7 percent last January and the stable local currency allowed the BSP to maintain a hawkish pause as it kept the benchmark interest rate steady at 6.25 percent for four straight rate-setting meetings since May this year.

Neumann said the central bank is seen delivering one more rate hike this year before cutting key policy rates by 50 basis points in the second half of next year and by another 100 basis points in 2025.

“We see one more rate hike coming through from the BSP in the fourth quarter,” he said.

He pointed out that the easing cycle in the Philippines is seen to materialize at the same time as the US Federal Reserve is likely to cut interest rates.

“We don’t see the possibility of dramatic cuts coming through. And that is actually in line with what we see elsewhere in the world. We don’t see the Fed cutting really quickly and similarly with the BSP,” he said.

Neumann added that he expects a gradual easing from the BSP in the next two years with the sticky inflation at the moment.

HSBC sees the peso hovering around the 57:$1 level due to the country’s wide current account deficit as well as ballooning trade gap.

After strengthening back to the 53:$1 level, the local currency is now approaching the 57:$1 handle due to the aggressive rate hikes by the Fed and the decision of Fitch Ratings to downgrade the credit rating of the US to AA+ from AAA.

HSBC earlier trimmed its gross domestic product (GDP) growth projections to 4.8 percent from 5.3 percent for this year and to 5.2 percent from 5.6 percent for next year.

The revised forecasts are lower than the six to seven percent for 2023 and 6.5 to eight percent for 2024 penned by economic managers via the Cabinet-level Development Budget Coordination Committee (DBCC).

The country’s GDP growth slowed to 4.3 percent in the second quarter from 6.4 percent in the first quarter due to the delayed impact of the aggressive rate hikes delivered by the BSP as well as lower government consumption.