BSP to hike rates by 75 bps until Sept. — analyst

Published August 14, 2022, 8:10 PM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) is expected to increase the policy rate this month and in September by a cumulative 75 basis points (bps) to bring the benchmark rate from 3.25 percent to four percent, according to a Security Bank Corp. analyst.

The BSP’s Monetary Board will meet on Thursday, Aug. 18, for its latest policy stance decision. BSP Governor Felipe M. Medalla has signalled that after the inflation rate further rose to 6.4 percent in July from 6.1 percent in June, the probability that they will lift the key rate by 50 bps has increased.

BSP building and logo/Reuters

For Security Bank chief economist, Robert Dan Roces, the BSP will not stop at 50 bps this week and a follow through next month is expected by the market.

“We also expect another 25 bps in its September meeting before a pause in 4Q (fourth quarter) to give way for the peak consumption and remittance season,” said Roces in a commentary.

He said inflation outlook is the primary consideration on how much rate hikes will be implemented due to its impact on growth since inflation “thwarts consumption – the main engine of the economy.

“The deeper-than-expected slowdown in 2Q GDP is unlikely to deter the BSP from raising interest rates by 50 basis points on Aug. 18. Sticky inflation, which actually weakened private consumption in 2Q and is poised to do so again this quarter, will compel the BSP to remain hawkish,” said Roces.

Medalla expects the full year GDP to grow comfortably at seven percent in 2022, which was within the 6.5 percent to 7.5 percent target range of the government. With the first quarter growth of 8.2 percent and the latest at 7.4 percent, GDP has expanded by 7.8 percent in the first half.

Inflation year-to-date has averaged at 4.7 percent, above the two percent to four percent government target. Currently, the BSP rate is a negative real rate given that inflation rate is higher than the key borrowing rate.

The BSP has so far increased the policy rate by 125 bps. Its initial lift off were two 25 bps rate hikes last May 19 and June 23, followed by an off-cycle 75 bps last July 14.

After this week’s Monetary Board policy meeting, the next one is on Sept. 22.