BSP likely to raise rates by another 50 bps

THE CENTRAL BANK will likely raise interest rates by another 50 basis points (bps) in the coming weeks following faster-than-expected August inflation, a global research firm said, even as price pressures due to oil and food products are seen to ease.

In a report, Capital Economics said they now see the Bangko Sentral ng Pilipinas (BSP) with an equally aggressive rate hike this month following the news of a 6.4% inflation rate for August.

The surge in prices will need an equally strong response from the central bank in order to quell future inflation expectations.

“Previously we had a 25-bp hike pencilled in for the central bank’s next meeting but, in light of the BSP’s recent comments and the sharper-than-expected rise in inflation last month, we suspect it will opt for another 50-bp hike instead,” analysts at the Londonbased firm said in a report over the weekend.

The 50-bp increase will follow a hike of similar magnitude during the BSP’s Aug. 9 policy meeting, which came at the heels of a 5.7% inflation reading for July, the fastest in nine years. Inflation has averaged 4.8% for the first eight months of the year, shy of a 4.9% forecast for the full year.

Capital Economics took the cue from BSP Governor Nestor A. Espenilla, Jr.’s statement last week that they are looking at the option to do an emergency policy meeting ahead of the Sept. 27 review.

Mr. Espenilla earlier noted that non-monetary measures carry the biggest weight in addressing cost-push factors due to the scarcity of cheap rice and elevated world crude oil prices. He also pointed out the weaker peso as aggravating price pressures.

The BSP chief later said the BSP will “take strong immediate action” to douse inflation expectations as well as “excessive” swings in the peso-dollar trading, which hovered close to the P54 level last week.

The more aggressive tightening is expected to come even as supply-side price pressures “should ease over the coming months,” the economic research firm added.

“The pass-through from higher oil prices, which has pushed up fuel and transport inflation, has probably now peaked. What’s more, food price inflation should ease if the government manages to pass legislation that would boost rice imports,” Capital Economics said.

“Inflation will drop back even more sharply at the start of next year, when the impact of the tax hikes on products including fuel, alcohol and tobacco drops out of the annual comparison.”

“Nonetheless, with inflation well above target, the BSP is becoming increasingly concerned about rising inflation expectations.”

The BSP has cumulatively raised rates by 100 bps since May, with rates ranging 3.5-4.5%.