Global banks expect more BSP rate hikes until 2019

BANGKO SENTRAL ng Pilipinas (BSP) may opt to raise rates several times until 2019 to make local yields competitive, two global banks said, noting that such moves would also boost the peso and help arrest surging inflation.

In separate reports, economists at ING Bank and Deutsche Bank both see successive tightening moves from the central bank, starting with another 50 basis points ( bp) within September.

“Additional rate hikes are likely in the next 12-16 months to also bring real policy rates to positive and maintain interest rate differentials,” ING said in a research note published yesterday.

“BSP’s hawkish rhetoric and signals of further action has kept PHP trading in a range.”

ING expects the key policy rate to rise to 5.25% by end-2019, suggesting that several rate hikes will be introduced in succession.

The BSP has adopted three rate hikes in a row this year in the face of surging inflation, worth a cumulative 100 bps from May to August. The central bank even responded with an aggressive 50-bp increase last month as inflation leaped to a nine-year high of 5.7% in July, in a bid to temper future price spikes for basic goods and services.

The central bank is set to hold its next rate-setting meeting on Sept. 27, although BSP Governor Nestor A. Espenilla, Jr. said policy makers have the option to hold

an off-cycle review following the shocking 6.4% inflation for August which was reported last month.

However, the BSP chief has pointed out that price pressures are largely due to thin rice supply and soaring world crude prices, which would require non-monetary measures to quickly address.

According to ING’s latest estimates, the BSP will raise rates by 50 bps this month, followed by a 25-bp increase during the fourth quarter to bring the overnight borrowing rate to 4.75% by December. This means that benchmark short-term rates will range from 4.25-5.25% by year’s end.

In a separate report, Deutsche Bank pointed out that the BSP would still raise rates by a total of 100 bps between September to December.

“Although we think headline inflation has peaked in the Philippines, it is at a rate well above BSP’s target, requiring further aggressive rate hikes. We expect rates to rise another 100 bps, including a 50 bps hike later this month,” the German lender said, adding that this will cushion peso depreciation and surging inflation.

Inflation has averaged 4.8% year-to-date, well beyond the 2-4% target band set by the BSP. Meanwhile, the peso has been trading above P53 versus the dollar in recent weeks, and is close to breaching the P54 level as of yesterday.

Last week, Mr. Espenilla said that the BSP will “take strong immediate action” to douse inflation expectations as well as “excessive” swings in the peso-dollar trading in order to maintain price stability.