Banks seen bracing for more rate hikes

After kicking off the year with a 50-basis-point interest rate hike, the Bangko Sentral ng Pilipinas (BSP) is expected to further raise key policy rates by another 25 to 50 basis points (bps) next month to bring inflation back to within the two to four percent target and anchor inflation expectations.

In an interview with Bloomberg Television, BSP Governor Felipe Medalla has ruled out the possibility of a hefty 75-bp hike in the next rate-setting meeting of the Monetary Board scheduled on March 23.

“Well if you say zero, 25, 50 or 75, I think the extremes could be ruled out. So depending on the data, most likely, it is a choice really between 25 and 50 in the next meeting. Unless we see a negative month-on-month inflation,” Medalla said.

On Thursday, the BSP raised interest rates by another 50 bps, 25 bps higher than the 25-bp hike delivered by the US Federal Reserve earlier, as it lifted its inflation forecasts to 6.1 percent from 4.5 percent for 2023 and to 3.1 percent from 2.8 percent for 2024.

The January inflation blew past expectations, hitting a fresh 14-year high of 8.7 percent.

Inflation accelerated to 5.8 percent last year, exceeding the central bank’s two to four percent target, due to soaring global oil prices arising from Russia’s invasion of Ukraine as well as elevated food prices caused by supply shocks.

Medalla said that timely and more aggressive whole-of-government actions are needed to mitigate the impact of persistent supply-side pressures on food prices, including trade positive measures and significant progress to boost productivity.

Monetary authorities, Medalla explained, are hoping that the government would loosen import restrictions on agricultural products and food, to follow the lesson from rice wherein the private sector decided the importation.

“My point is, let’s debate on how the higher tariffs will be and not how much to import because the big mistakes often happen when the quantity to import is decided politically or bureaucratically,” Medalla said.

According to Medalla, inflation is now fueled by meat, eggs, vegetables as well as strong demand for rentals and restaurant prices and not rice and fuel.

“We’re seeing that we may have what’s called second order effects. The prices of services are beginning to rise despite the fact that shortages are limited to food,” the BSP chief said.

He explained that the inflation for services is also beginning to rise.

“So we think that there’s quite a big risk of inflationary expectations being disanchored. From our point of view, there are two mistakes that we can make. One is to raise too much and the other to raise too little. If we raise too much, its easy to correct in future policy meetings. If we raise too little, inflationary expectations could be disanchored and that will be very hard to reverse,” Medalla said.

The BSP now sees inflation returning to within the two to four percent target either in November or December instead of the third quarter of the year.

Since the start of the interest rate liftoff in May last year, the BSP has raised key policy rates by 400 bps, bringing the benchmark rate to a 16-year high of six percent from an all-time low of two percent to tame inflation and stabilize the peso.

Aside from elevated inflation, Medalla said in a separate interview with CNBC Asia that the 50bp hike last Thursday was more prudent as the country’s gross domestic product (GDP) grew at a faster-than-expected rate of 7.2 percent in the fourth quarter of last year.

This brought the 2022 GDP expansion to 7.6 percent, slightly higher than the 6.5 to 7.5 percent target penned by the Cabinet-level Development Budget Coordination Committee, from 5.7 percent in 2021.

ING Bank senior economist Nicholas Mapa said the Monetary Board is likely to raise key policy rates by 25 bps at the March meeting to bring the terminal rate to 6.25 percent.

“BSP’s latest inflation forecast and admission that price pressure has broadened could open the door for additional rate hikes in the coming months,” Mapa said.

Aris Dacanay, economist for ASEAN at HSBC, said the Monetary Board is seen raising policy rates by 50 bps in the first half and then keeping rates steady for the rest of 2023.

“We expect the BSP to do what it said it will and continue its tightening cycle. We anticipate the BSP to hike by 25 bps in March and another 25 bps in May, bringing the policy rate to 6.50 percent before pausing. We then expect the BSP to hold this tight monetary stance throughout the rest of 2023,” Dacanay said.

The British banking giant sees inflation peaking in the first quarter as supply-side price pressures could abate to some extent in February due to non-monetary policies finally kicking in.

DBS economist for ASEAN Chua Han Teng said that policymakers in the Philippines continue to see various upside inflation risks for 2023 and 2024, including global food market uncertainties, domestic food shortages, transport fare hikes and higher-than-expected wage adjustments.

The Singaporean investment bank now expects the BSP to deliver another 75-bp rate increase within the first half as it remains clearly hawkish to bring inflation back to within the two to four percent target and anchor inflation expectations.

“Continued BSP hawkishness amid scorching inflation, terminal rate expectations are likely to rise. We, therefore, raise our terminal policy rate forecast to 6.75 percent, implying a couple more 25 bps increases before pausing in the second half,” Teng said.

According to Teng, another upside inflation surprise could very well attract a follow-up 50-bp increase.