Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno has likely signalled a possible interest rates hike tomorrow, May 19, when he said on Wednesday that they now have limited monetary space to continue a loose policy stance due to high inflation and with second-round effects starting to put more pressure on prices.
“The space for maintaining an accommodative policy stance has considerably narrowed given how the April 2022 inflation of 4.9 percent settled near the higher end of the BSP’s forecast range of 4.2 (percent) to five percent,” said Diokno during his weekly online press chat on Wednesday, May 18. “Meanwhile, second round effects are starting to manifest,” he also said.
Due to the rising oil and food prices, the Regional Tripartite Wages and Productivity Board on May 13 approved a P33 increase in the minimum wages in the National Capital Region (NCR), bringing the pay rate to P570 and P533 for workers in the non-agriculture and agriculture sectors. For Western Visayas, the wage increase was P55 and P110 to P450 and P420, respectively.
Diokno said the recent approval of the wage hikes “leaves the door open for further increases in other regions as wage petitions were deferred since 2020 as the pandemic disrupted economic activities.” This will translate to a more evident second-round effects to inflation.
With the economy also growing higher than anticipated for the first quarter at 8.3 percent, the BSP chief said this has intensified calls for the “withdrawal” of an accommodative policy stance which the Monetary Board has maintained since November 2020 with a record low of a two-percent benchmark rate.
“These developments strengthened the case for a withdrawal of monetary policy accommodation as inflationary pressures now appear more likely to persist and threaten to disanchor inflation expectations,” said Diokno. The BSP’s two percent to four percent inflation target has been exceeded in March and April.
While the BSP is prepared and ready to deal with all risks to inflation and growth outlook, Diokno reiterated that “any adjustments in the monetary policy stance will be done in a timely manner so as not to disrupt the growth momentum while preventing price pressures from becoming entrenched.”
He added that the economy, even as it “appears to be on track or towards returning to its pre-pandemic trajectory”, still has lingering and significant downside risks such as threats of a Covid-19 resurgence and slower global economic activity.
Diokno also commented that a prolonged Russia-Ukraine war will “understandably put pressure on prices, especially that of oil.”
“Not only has this been reflected in the rice and domestic fuel prices, but this has also spilled over to products related to oil and those that are affected by movements in transport prices,” he noted.
Diokno sees challenge in containing the current persistent price pressures and these should not translate to “undue movements in inflation expectations or to further second round effects.”
He said inflation pressures in recent months have been linked mainly to supply side factors which are still best addressed by targeted non-monetary interventions by the National Government.
“The Monetary Board will continue to discuss tomorrow (May 19) the implications of these developments on the monetary policy stance,” said Diokno.
It is widely expected by market watchers that the BSP may decide to increase key rates by at least 25 basis points or as high as 50 basis points on May 19.
British bank HSBC analysts said with inflation gaining momentum, and with price pressures “bound to rise further”, they also see second round effects materializing fast. The foreign bank expects inflation to increase further to 5.5 percent in the second quarter this year, up from its previous estimate of 4.7 percent.
“Other central banks are beginning to follow the (US) Fed and are hiking rates much earlier than expected (and with a) faster-than-expected growth, the Philippines may join the bandwagon much earlier than planned,” said HSBC.
HSBC predicts a policy rate hike of 25 basis points on May 19 and another 25 basis points increase next month, or in the June 24 Monetary Board meeting.
“We then anticipate 50bp (basis point) worth of hikes in 3Q22 (third quarter 2022) and a 25bp hike in each of the subsequent quarters until 3Q23, after which the policy rate will remain at four percent,” added HSBC.