With a higher-than-forecast January inflation, the market now expects the central bank’s Monetary Board to increase the key borrowing rate by 50 basis points (bps) next week to control price pressures.
This will bring the policy rate to six percent on Feb. 16, from 5.5 percent. The BSP raised the reverse repurchase (RRP) rate – which is its main tool for inflation and liquidity management -- by a cumulative 350 bps in 2022 to make sure inflation will ease to within the two percent to four percent target range by October or November this year.
The BSP had projected a 7.5 percent to 8.3 percent inflation for January, way off the mark of the 8.7 percent actual figure, which was the highest since November 2008. The market consensus forecast was just 7.6 percent, according to ING Bank senior economist, Nicholas Mapa.
However, Mapa said in an email on Tuesday, Feb. 7, that as far as credibility goes, this may not affect BSP’s reputation as a usually on-point inflation-targetting central bank.
This is despite that he thinks BSP’s 4.5 percent average forecast for 2023 “is quite low”. “I’m at 5.8% now but perhaps forecasts can improve as more data and trends become apparent,” he said. From its last policy-setting meeting on Dec. 15, the BSP forecasts 2023 inflation to average at 4.5 percent while it expects 2.8 percent in 2024.
Mapa said forecasting important economic indicators such as inflation “is quite difficult and all of us will need to revisit our models in the post-lockdown world” but he also noted that “broad-based inflation and more importantly second round effects, are difficult to model because we are now seeing inflation feed on itself.”
Mapa said the BSP will “whip out a 50bp rate increase in an attempt to get ahead of surging inflation.” He also said that BSP will not stop at raising the key rates on Feb. 16 and March 23 and “will need to stay hawkish in the near term.”
“BSP increased rates on consumer credit last January which could act as an additional tightening measure to combat soaring inflation. Nevertheless, price pressures are broad-based and BSP will likely need to sustain rate hikes until we see inflation head back towards the target in a convincing manner,” said Mapa.
Hongkong-based HSBC economist, Aris Dacanay, in a commentary on Tuesday, said inflation sprinted in January due to persistent supply challenges, reverberating second-round effects and strong demand-side pressures.
Dacanay said the “enormous upside surprise in CPI (consumer price index)” plus the strong fourth quarter GDP and 7.6 percent full-year growth, paves the way for a higher rate hike next week.
“No one saw it coming. In fact, the market expected inflation to go down,” he said, citing a survey which placed the inflation forecast range at 5.4 percent to eight percent for January, below the actual 8.1 percent inflation in December 2022.
Dacanay said the January inflation is also the highest in the ASEAN trade bloc. “Inflation rates in most of ASEAN have been treading downwards since 4Q 2022, but inflation in the Philippines has yet to reach the peak. This was the 11th consecutive month of inflation accelerating. And momentum is still relentless, with m-o-m inflation at 1.0%,” he added.