Think tank bets on 25 bps rate hike in next BSP meeting

UK-based think tank Pantheon Macroeconomics expects the Bangko Sentral ng Pilipinas (BSP) to go for a smaller rate hike of 25 basis points (bps) next month, while a rate rollback is likely in the fourth quarter.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said another immediate rate hike is expected in March as the BSP raised its annual inflation forecast for this year.

“We reckon the Monetary Board will opt for the smaller hike, with the BSP dropping hints that it needs help in the fight against primarily supplyside food price pressures,” he said.

BSP Governor Felipe Medalla has signaled a 25 bp or 50 bp rate hike next month, ruling out “a no increase” scenario for the next meeting on March 23.

The BSP raised key policy rates by 50 bps last Thursday, which brought the overnight reverse repurchase rate to six percent, the highest since the 7.50 percent in May 2007.

It hiked its inflation forecast for this year to 6.1 percent from 4.5 percent, previously.

This, after the January inflation print hit 8.7 percent, which is the highest since the 9.1 in November 2008.

The BSP also cited the stronger rebound in domestic demand and gross domestic product growth in the fourth quarter as a reason for the changes in the inflation forecast.

For next year, the BSP adjusted the inflation forecast to 3.1 percent from the previous 2.8 percent.

“The revised 2024 projection seems reasonable to us, but the much higher 2023 outlook – which implies a further acceleration from 5.8 percent last year – seems overly pessimistic, especially when taking into account the favorable base effects which will kick-in from March,” Chanco said.

For the think tank, he said the only legitimate upside risk to inflation mentioned by the BSP is the continued domestic shortages in key food items.

The BSP said the risks to inflation for this year and next year now lean to the upside due to pressures from the impact of global food market uncertainties, as well as additional transport fare hikes amid elevated oil prices, and higher than expected wage adjustments.

Pantheon Macroeconomics is maintaining its view that the BSP would roll back some of its rate increases in the fourth quarter of this year.

Chanco said the think tank expects “the BSP will start to roll back some of its tightening in the fourth quarter – when inflation returns to the two to four percent range – by 50 basis points.”