Security Bank expects the Bangko Sentral ng Pilipinas (BSP) to increase interest rates by another 50 basis points (bps) when it meets this week that will bring the overnight lending rate to 2.75 percent.
“This is attributed to the larger size of the Fed’s rate hikes and rising inflation expectations locally,” it said.
Security Bank said the midpoint of the target range for the federal funds rate would go to 3.4 percent based on the dot-plot forecast released by the United States Federal Reserve following its 75 bps adjustment last June 15.
“Meanwhile, Philippine inflation is expected to average 4.5 percent with scope to go higher on emerging risks from food and volatility from oil prices,” it added.
It also pointed out that incoming BSP Governor Felipe Medalla, whose term will start after the June meeting, has signaled a gradual pace of 25 bps increase.
“We believe he will only be able to do so when he takes the helm. A 50 bps bump in June will let the BSP balance growth recovery and manage inflation, while getting ahead of the Fed’s pace,” Security Bank said.
“This should also help temper the peso’s weakness with the current account deficit projected at $19.1 billion this year,” it added.
Security Bank said it is adjusting its forecast of rate increase this year to 1.5 percentage points from an earlier 1 percentage point target, bringing the end of year Philippine policy rate to 3.50 percent from the base estimate of 3 percent.
“Following the 25 bps hike last May, we see the following schedules: June: +50bps, August: +25bps, Sept: +25bps, Nov: +25bps,” it said, noting the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic levels.
“Inflation and the currency’s weakness are significant headwinds to further recovery and as such the central bank may need to act forcefully this June,” Security Bank added.
