BSP key rate seen at 4.25% by year-end — BPI

Published August 5, 2022, 2:24 PM

by Lee C. Chipongian

The central bank may raise the policy rate by another 100 basis points (bps) to 4.25 percent by year-end given the elevated inflation for the rest of 2022, according to analysts from Bank of the Philippine Islands (BPI).

In a commentary on Friday, Aug. 5, after the government announced a higher July inflation rate of 6.4 percent versus 6.1 percent in June, BPI said they expect the Bangko Sentral ng Pilipinas (BSP) to sustain its “hawkish” monetary policy stance for the rest of 2022. A hawkish stance implies further tightening. Another 100 bps rate increase from the current 3.25 percent will raise the key rate to 4.25 percent.

“With inflation still on the rise, we continue to expect rate hikes from the BSP until the end of the year. There is reason to believe that the economy has enough capacity to absorb policy normalization. While a hike towards 4.25% (percent) by end-2022 will be a slight damper on demand, the contractionary risk of de-anchoring inflationary expectations carries more weight,” said BPI analysts.

The bank added that since household consumption is about two-thirds of the economy – “not getting inflation in check will likely have a more severe impact on consumption and overall demand.”

BPI cited data in 2018 and 2019 that showed that even when the BSP benchmark rate is above four percent, the GDP grew comfortably at 6.3 percent in 2018 and 6.1 percent in 2019. For this year, the government forecasts 6.5 percent to 7.5 percent GDP growth.

As for market implications, the Ayala-led bank said “upward pressure on local yields might persist amid lingering inflationary pressures.”

“Supply disruptions have kept food prices elevated and could be vulnerable to higher transport costs, trade restrictions, and weather disturbances. This, along with sustained peso depreciation due to import expansion and hawkish (US) Fed policy will likely compel the BSP keep up with its adjustments through 2023,” said BPI.

The peso was at the P56 level vis-à-vis the US dollar in early July before regaining back lost grounds to the P55 range after the BSP surprised the market with an off-cycle 75 bps rate increase last July 14.

BPI said the peso will continue to depreciate in the medium term with higher import demand to supply a recovering economy, and a US Federal Reserve that will continue to tighten US rates even at the risk of its own economy’s mild recession.

“Dollar demand due to domestic demand recovery may remain substantial and keep the exchange rate above the P55 level. Meanwhile, the possibility of tighter dollar supply may contribute further to peso depreciation,” said BPI.

The BSP will meet on Aug. 18 for its next monetary policy meeting. BSP Governor Felipe M. Medalla has signalled to the market that they intend to raise the key rate by another 25 bps to 50 bps, which will bring the benchmark rate to 3.5 percent to 3.75 percent.

After August, the Monetary Board has three more monetary policy meetings for the year, in September, November and December.