The Monetary Board is expected to raise by another 50 basis points the key rates of the Bangko Sentral ng Pilipinas this week even as inflation dipped in August.
The move will be the fifth consecutive time this year that the Board has decided to raise the key rates as latest inflation forecasts have shifted higher and have breached the government’s target.
BSP’s overnight reverse repurchase facility now stands at 3.75 after it went up by 50 basis points last month.
The interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively..
The Monetary Board has raised the key rates by a total of 175 basis points to combat broadening price pressures.
Felipe Medalla, BSP Governor, said during the last monetary policy stance meeting that the BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2-4 percent target range at 5.4 percent.
“While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures,” Medalla said.
He also stressed that “elevated inflation expectations likewise highlight the risk of further second-round effects.”
After five consecutive months of uptrend, the country’s inflation slightly eased in August to 6.3 percent due mainly to lower annual increases in transportation, food and non-alcoholic beverages.
In August last year, inflation rate was at 4.4 percent.
The average inflation from January to August now stands at 4.9 percent, way above the full-year average target of between two and four percent.
Core inflation, which excludes volatile food and energy items, stood at 4.6 percent from 3.9 percent in July. In August last year, core inflation was at 2.8 percent.
In a poll conducted by Reuters, economists expect another 50 basis point rise to 4.25 percent at its Sept. 22 meeting “to support a weakening currency and blunt its effect on imported inflation.”
Down more than 11 percent for the year, the Philippines peso is one of Asia’s worst-performing currencies. Its poor showing against the US dollar, propped up by an aggressive Federal Reserve set to deliver another 75 basis point rise on Wednesday, has led to a record trade deficit and higher inflation.
Over 60 percent majority of economists polled, or 13 of 21, compared with half of economists forecasting 4.00 percent in the previous poll. If realized, that would push the borrowing rate to the highest since August 2019.
Six now expected a quarter point rise to 4.00 percent, one predicted a jumbo 75 basis point to 4.50 percent, and a lone voice in the Sept. 13-19 poll expected no move from the BSP.
“The US Fed’s aggressive moves at a time when the Philippines’ (balance of payments) is under pressure continues to exert pressure on the PHP,” noted Debalika Sarkar, economist at ANZ, referring to the peso currency.
“It is therefore conceivable that rate hikes will need to be more aggressive to minimize FX volatility and the passthrough to domestic prices.”
Over 75 percent, or 13 of 17, forecast the interest rate to be at 4.50 percent or higher by year-end – also the expected peak in this cycle – 50 basis points higher than in the previous poll.
Eight said 4.50 percent, and four said 4.75 percent. The remaining four said 4.25 percent or lower.
Despite inflation dipping to 6.3 percent in August from July’s four-year high of 6.4 percent, analysts said it hasn’t peaked yet, leaving scope for further rate hikes. The central bank targets inflation at 2-4 percent.
“A forceful approach by the BSP to bring forward future rate hikes to the September meeting would not only reduce upside inflation risks but also cement the central bank’s credibility and commitment to bring inflation back to its target,” noted Han Teng Chua, economist at DBS Bank.
Dennis Mapa, Undersecretary of the Philippine Statistics Authority, said the slowdown in inflation at the national level in August “was primarily due to the lower annual increment recorded in the index for transport at 14.6 percent, from 18.1 percent in the previous month.” This was followed by food and non-alcoholic beverages whose index declined by 6.3 percent from 6.9 percent in July 2022.
On the other hand, inflation rates were higher for the following commodity groups during the month: alcoholic beverages and tobacco; clothing and footwear; housing, water, electricity, gas and other fuels; furnishings, household equipment, and routine household maintenance; health; recreation, sport and culture; education services; restaurants and accommodation services; and personal care, and miscellaneous goods and services.
Upside risks, according to Medalla, also continue to dominate the inflation outlook up to 2023.
Meanwhile, he said the “impact of a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections continue to be the main downside risks to the outlook.”
At the same time, Medalla said that despite some moderation in economic activity in recent months, overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.
“For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon. The favorable growth outcome in the first half of the year also gives the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds,” Medalla said. – with Reuters
