Pause in rate hikes likely after May – think tank

The Bangko Sentral ng Pilipinas (BSP) may take a pause in interest rate hikes after May as inflation is expected to slow down further this year, according to UK-based think tank Oxford Economics.

“We expect the BSP to pause its monetary tightening after hiking by 25 basis points (bps) in both March and May, lifting the policy rate to 6.5 percent,” Oxford Economics assistant economist Makoto Tsuchiya said in a research brief.

Last month, the BSP raised its key policy rate by 50 bps to six percent to tame inflation.

The country’s headline inflation rate eased slightly to 8.6 percent in February from the 14-year high of 8.7 percent in January 2023, after being on an uptrend since August last year.

Transport and food prices posted slower upticks.

Inflation averaged 8.6 percent in the first two months of the year.

Tsuchiya said recent data on price movement shows the upsurge is still being driven by supply-side components including food and energy prices.

As such, he said inflation is expected to slow down later this year as supply bottlenecks dissipate.

He said global energy prices are expected to fall, while the country’s imports should help ease the uptick in food prices.

“Declining inflation should then allow the BSP to pause after the combined 50-bp hikes, and eventually turn to monetary easing in 2024 to reach the neutral rate of five percent,” he said.

He said a drop in shortterm interest rates due to the expectation of lower future policy rates would lead to lower long-term rates.

Aside from reducing the pressure on the BSP to tighten monetary policy, he said a slowdown in inflation would lead to lower inflation expectations, which would then put downward pressures on the nominal bond yield.

As inflation becomes more stable, he said this would also reduce investor uncertainty on the path of future inflation and allow them to demand lower premia for holding local currency bonds.

While the expectation is inflation would come down and the monetary tightening would end soon, he said the upside risks are still high.

“Developments in domestic inflation and the US Fed’s policy could lead to further rate hikes by the BSP than we currently expect,” Tsuchiya said.

Should risks materialize, he said investors could become more cautious in the near-term.

“This would push up long-term rates due to the higher perceived risks associated with holding Philippine bonds,” he said.