The central bank’s Monetary Board may pause its hawkish stance when it has brought the benchmark borrowing rate to 6.5 percent, according to HSBC.
The current Bangko Sentral ng Pilipinas (BSP) policy rate or its overnight reverse repurchase (RRP) rate is 5.5 percent. This is the highest RRP rate since December 2008. The BSP also adjusted the interest rates on the overnight deposit and lending facilities at five percent and six percent, respectively, on Dec. 15, 2022.
HSBC economist, Aris Dacanay, said on Thursday, Feb. 9, that the BSP is expected to increase the policy rate by at least 100 basis points (bps) to ensure inflation expectations are well anchored after the higher-than-forecast January inflation rate of 8.7 percent, up from December’s 8.1 percent and surpassing all other projections including the BSP.
Dacanay said that “to promote stability” the BSP will remain hawkish and then pause, and could hold the 6.5 percent RRP rate until the second half of 2024. By the middle of next year, he expects the Monetary Board to start reducing its policy rate.
“We raise our policy rate forecast and, at the same time, expect (BSP) to maintain its aggressive rate hiking position a little longer - delivering a 50bp (previously 25bp) hike at next week's rate setting meeting. This would bring the overnight reverse repurchase rate to 6.00%. This means we expect the BSP to hike rates even more than the Fed did (25bp) last week,” he said in a commentary.
Most market observers now expect the BSP to act on a 50 bps rate hike next Thursday, Feb. 16, for its first policy meeting for the year.
BSP Governor Felipe M. Medalla has signalled earlier that they will increase the key rate this month and on March 23. Initially, before the January inflation release, the BSP chief was hinting at two 25 bps rate hikes only, which will lift the RRP rate to six percent by the end of the first quarter.
HSBC has also revised its average inflation forecast for 2023 higher, from five percent to 5.7 percent, while keeping its previous 3.6 percent estimate for 2024.
According to Dacanay, the January consumer price index results “were eye-watering” and that the year “started badly”. He said the consensus from surveys is that January inflation will only reach 7.7 percent, below December’s 8.1 percent which was supposed to be the peak.
“The big upside surprise in January has set the tone for the inflation outlook for the rest of the year. We therefore raise our 2023 inflation forecast to 5.7% from 5.0%, but our 2024 forecast remains unchanged at 3.6%,” said Dacanay.
He added that “all these numbers suggest that the policy rate outlook is more than just following the Fed in lock step - it is also about the Philippines facing an inflation problem of its own. Supply constraints are posing a risk of rising inflation expectations, while demand from the country's economic 're-opening' remains strong.”
Both the BSP and the market continue to assess upside risks to inflation for 2023 and in 2024. The expected upside risks to inflation over the policy horizon come from international food prices and supply chain constraints.
On the local side, the trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.
The downside risks continue to be the impact of a weaker global economic recovery.
Due to these persistent upside risks to inflation and elevated inflation expectations, the Monetary Board is expected to still remain aggressive in its monetary actions to bring inflation back to within target range of two percent to four percent by early 2024.