Analysts see scope for one more BSP rate hike

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may need one more interest rate increase before year end as El Niño threatens food prices and the peso remains under pressure, analysts said, even as the central bank signaled it hopes to pause after three consecutive hikes.

The Monetary Board on Aug. 27 raised the target reverse repurchase (RRP) rate, the benchmark that guides borrowing costs across the economy, by 25 basis points to five percent.

This brought the BSP’s cumulative tightening since April to 75 basis points as it sought to contain inflation expectations and prevent supply-driven price increases from spreading to other goods and services.

ANZ Research economists Kausani Basak and Sanjay Mathur expect the BSP to keep the policy rate unchanged at its Oct. 22 meeting before delivering another increase in December.

“We expect the BSP to implement a hike in December in response to El Niño related price rises, taking the policy rate to 5.25 percent by year end,” ANZ said.

Although inflation eased in June and July, ANZ said risks remain substantial later in the year as El Niño pushes food prices higher. The impact of minimum wage adjustments is also expected to appear with a lag and keep inflation above target next year.

ANZ expects the BSP to adopt a wait-and-see approach in October as it assesses incoming inflation data. However, it said the real policy rate remains accommodative, giving the central bank room to tighten further if price pressures worsen.

The real policy rate is the benchmark interest rate after accounting for inflation. A negative rate means inflation is running faster than nominal borrowing costs, suggesting that monetary conditions may not yet be restrictive enough to significantly curb demand.

Meanwhile, DBS economists Radhika Rao and Chua Han Teng said most central banks in the Association of Southeast Asian Nations (ASEAN) are likely to remain on hold for the rest of the year, with the Philippines as the sole exception.

“Above-target inflation leaves open the possibility of one final, measured BSP rate hike,” DBS said.

The bank noted that the Philippines was the only ASEAN-6 economy whose currency had weakened against the dollar so far in the third quarter.

The peso declined by 0.8 percent during the period, while the other regional currencies appreciated by 0.9 percent to 1.7 percent.

The peso was also down by 4.9 percent against the dollar since the start of the year.

DBS said the latest BSP increase was intended to contain inflation expectations and support the local currency.

It warned that renewed energy price increases, a stronger dollar, elevated global interest rates and equity market volatility could bring currency risks back to the forefront and prompt the BSP to tighten further.

GlobalSource Partners country analyst Diwa Guinigundo likewise said the latest rate increase was a step in the right direction, but warned that it was not accompanied by sufficiently strong forward guidance.