Central bank officials strongly hinted of future interest rate hikes in the next four Monetary Board policy meetings to temper an unabated rising inflation, while analysts expect an end-2022 key rate of four percent from the current 3.25 percent, which means another 75 basis points (bps) rate hike in the next months.
The next possible rate increase could be on Aug. 18. The BSP may also opt for other off-cycle rate actions in between the scheduled policy meetings in September, November and December.
“Will meet on Aug. 18,” said Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla on Thursday, July 14. “What we will do is of course, data dependent,” he added. He’s referring to crucial interest rate-moving economic indicators such as the second quarter GDP to be released on Aug. 9 and the July inflation rate announcement on Aug. 5.
In a virtual press briefing hours after Medalla disclosed the surprised off-cycle rate hike of 75 bps on Thursday morning, BSP Deputy Governor Francisco G. Dakila Jr. said further rate increases are still possible depending on the growth data and the inflation rates in the coming months.
“We would have new information (Aug. 18) on inflation and GDP growth and that should help us assess whether there is a need for further adjustments in the monetary policy stance. As we have always emphasized, we remain data dependent and (GDP, inflation) are key data that the Monetary Board will be looking at. Therefore, the Aug. 18 meeting should push through,” said Dakila.
Market analysts including a former central bank official expect the Monetary Board to raise the policy rate by another 75 bps to bring the rate to four percent this year.
Diwa C. Guinigundo, former BSP Deputy Governor, sees the BSP rate at four percent flat by end-2022, given “all the data available and known to us at this time,” he said.
Guinigundo told Manila Bulletin that at the current 3.25 percent policy rate, the BSP will have enough space to adjust higher because as of June 23, the inflation forecast was at five percent for 2022 and 4.2 percent for 2023. For the first six months this year, the actual inflation is at 4.4 percent average. It’s still a negative real rate and it has been for the past 21 months. There is a negative real interest rate when the inflation rate is higher than the central bank rate.
“BSP was right to continue tightening and tightening more aggressively. Forecast is beyond target. Second-round effects on. Erate (exchange rate) too fast depreciating,” he said, adding that the “economy is strong enough to absorb an interest rate increase. Inflation expectations need to remain anchored.”
Economist Jun Neri of Bank of the Philippine Islands (BPI) said that with a persistent elevated US inflation, the US Federal Reserve is expected to have more aggressive rate hikes of as much as 100 bps this month, and the anticipation is an end-2022 Fed funds rate of 3.75 percent to four percent. “In this scenario, the BSP may need to adjust its policy rate further, possibly above 4 percent. Otherwise, the peso will likely be the one to adjust,” he said in a commentary on Thursday.
“Despite the jump in June, inflation has probably not peaked yet,” Neri also noted. BPI expects inflation will continue to go up until October. The bank sees an average inflation of five percent to 5.5 percent. “Given this, the BSP may hike again by at least 25 bps in its August policy meeting,” he said.
With both US Fed and BSP hawkish stance, the peso is expected to be still in a depreciating mode in the medium term as import demand increase with a recovering economy. “Dollar demand may pick up and keep the exchange rate above the P54 level. Meanwhile, the possibility of tighter dollar supply may contribute further to peso depreciation,” said Neri.
On Thursday, following the off-cycle BSP rate increase, the peso closed stronger at P56.15 from its Wednesday level of P56.26.
Dakila, during the press briefing, reiterated that the BSP does not target a particular peso-US dollar rate but will intervene to smoothen exchange rate volatilities any time.
“We’re not targetting any specific level of foreign exchange rate. As you would see, many other central banks are also on the tightening mode. In this instance, we have been normalizing our policy stance following a significant adjustment that were done during the pandemic,” said Dakila.
The BSP expects a stronger second quarter GDP performance than the 8.3-percent growth in the first three months, while an above target inflation – or higher than the two percent to four percent target – is expected to persist until the first quarter of 2023. In fact the BSP expects inflation to return to within the target range by 2024.
The recovering economy amid high inflation which hit 6.1 percent in June, and an exchange rate that already breached P56 vis-à-vis the US dollar, has convinced the Monetary Board to increase the key borrowing rate by 25 bps last May 19 and again on June 23 to curb the buildup of inflation expectations, followed by a more aggressive rate hike of 75 bps on July 14. This was the first time that the BSP has raised the RRP rate by this much, in a single policy action since the BSP adopted both the inflation targetting mode in 2002 and the interest rate corridor framework in 2016.
The last time BSP had an off-cycle monetary policy decision was on April 16, 2020. The decision then was to cut the policy rate by 50 bps to 2.75 percent in view of the onset of the pandemic.
Dakila said the 75 bps rate increase on Thursday, was the largest that the BSP has undertaken but in terms of policy actions, whether to cut or to increase rates, the most recent time that the BSP made an adjustment of this magnitude on the policy rate was on June 23, 2016 when the key rate was reduced by 100 bps from four percent to three percent. “But this was an operational adjustment after the BSP adopted the interest rate corridor system for the BSP’s monetary operations,” he explained.
In 2018, in August and September of that year, the BSP delivered back-to-back increases in the policy rate of 50 bps each for a total of 100 bps to bring the policy rate to 4.5 percent in response to persistent and broadening price pressures from supply side shocks, said Dakila.