More analysts bet on BSP rate hike this May

Stronger-than-expected Q1 growth among cited reasons for first increase since 2020

Expectations that the Bangko Sentral ng Pilipinas (BSP) will start raising interest rates this week instead of later are gaining strength due to the stronger-than-expected economic growth in the first quarter on the one hand, and observations that growth momentum is facing rising headwinds on the other hand.

The market consensus is that the BSP will keep its overnight borrowing rate at a record low of 2 percent, where it has been since November 2020.

Capital Economics, however, added their voice to those expecting a 25-basis-point rise on May 19 of the BSP’s key policy rate.

Under consideration

BSP Governor Benjamin Diokno had said that the Monetary Board might consider a rate hike in June if the economy grew by 6 percent to 7 percent in the first quarter. Before that, Diokno said tightening would not happen until the second semester.

“With the central bank governor signaling his intention to start normalizing policy soon and both inflation and growth exceeding expectations, May’s meeting will probably mark lift off for the BSP,” Capital Economics said in a commentary.

The United Kingdom-based economic research consultancy added that growth of Philippine gross domestic product was likely to remain strong in the second quarter. At the same time, the company noted that inflation has breached the upper end of the government’s target band of 2 to 4 percent, registering at 4.9 percent yearon-year in April.

“That said, headwinds are mounting [and] the boost from reopening [of the economy with the easing of pandemic-related restrictions] will start to fade while higher inflation will start to drag on consumption,” Capital Economics said.

Capital Economics doubts that the BSP will embark on an aggressive tightening cycle, but is on the

rhetoric when they meet on May 19. GoldmanSachs has earlier said it expected the BSP to raise the key policy rate by 25 bps in each of the succeeding eight policy meetings starting this month, to end up at 4 percent by the first quarter or 2023.

The New York-based investment banking firm said tha while recent comments by policymakers suggest a more concrete policy pivot to an inflation focus, Diokno’s recent comments also suggest that GoldmanSach’s forecast for a hike this week is “a close call with some risk that the first hike is postponed until the June meeting instead.”

Still, Goldman Sachs said the BSP could begin the tightening cycle sooner rather than later, especially considering the combination of GDP growth and inflation trajectory as well as signals from the United States Federal Reserve that they would again raise their key rate by 50 bps in at least two upcoming meetings. Over the past two policy meetings, the US Fed raised rates by a total of 75 bps.

‘Earlier rate hike’

ING Bank said last week that with the GDP growth report for the first quarter, they now “fully expect” the BSP to make a move this week.

Meanwhile, Citi thinks the first BSP rate hike would happen in June, by 25 bps.

“In any case, we recognize that the probability of an earlier rate hike on May 19 has increased,” Citi said. “For 2022, we expect only one more 25bp hike in September with the BSP [and Citi] expecting inflation to return to the 2 to 4 percent target [range] next year.”