Private sector analysts project the Bangko Sentral ng Pilipinas’ (BSP) continuing policy rate hikes may peak at eight percent this year before cutting rates in 2024 and 2025.
Based on the central bank's latest Private Sector Forecasts survey in February, economists expect the BSP to lift the benchmark rate by as much as 250 basis points (bps) this year, or from 5.5 percent to eight percent. The central bank’s Monetary Board already raised the borrowing rate or the reverse repurchase (RRP) by 50 bps last week to six percent, which was an expected move.
On inflation, 24 analysts noted that a possible top rate of eight percent – based on a projected range of 25 bps to 250 bps -- is an appropriate response to elevated inflation expectations for 2023 until 2025.
By next year, assuming the RRP rate is a high of eight percent, the BSP said the market expects a reversal of its hawkish stance and start reducing the key rate by as much as 250 bps in 2023, which will bring it back to below six percent. By 2025, analysts think the BSP may have ongoing rate cuts and will further reduce it by another 100 bps to 4.5 percent RRP rate.
In the February 2023 survey of economists, which part of the Monetary Policy Report (MPC), analysts have a higher mean inflation forecast for 2023 of six percent versus its January 2023 projection of 4.9 percent because of demand-side price pressures and supply shocks. This was lower compared to BSP’s own forecast of 6.1 percent average for this year.
For 2024, surveyed analysts forecast inflation will drop to four percent, also higher from its previous estimate of 3.7 percent. It is also higher than BSP’s 3.1 percent forecast for next year. By 2025, analysts expect inflation to average at 4.1 percent.
Taking into account the expected direction of inflation, the BSP said most of the analysts anticipate the BSP to further tighten monetary policy settings and increase the RRP rate by a range of 25 bps to 250 bps this year.
BSP Governor Felipe M. Medalla on Feb. 16, which was when the Monetary Board raised the RRP by 50 bps, said another 25 bps to 50 bps increase is on the table for the next policy meeting on March 23.
He also said that there could be two more rate hikes after the first quarter, but is not ruling out a possible pause after the second quarter this year.
Last Friday, in interviews with foreign media, Medalla hinted that they could decide for another 50 bps rate increase next month because it is easier to correct a rate hike versus reversing a smaller adjustment since by then, it would have affected inflation expectations which BSP is trying to preserve and be well-anchored at all times.
Meanwhile, the BSP said surveyed analysts expect inflation to keep above the upper-end of the government’s two percent to four percent target band this year following the higher-than-forecast 8.7 percent inflation in January, beating consensus forecast of 7.7 percent.
“Risks to the inflation outlook remain tilted to the upside due to the continued recovery of domestic demand, alongside high prices of goods and services due mainly to supply-related concerns and second-round effects,” said the BSP.
As for the upside risks, these will continue to come from high prices of goods and services, including oil and food, due to supply-related concerns attributed mainly to weather disturbances and geopolitical tensions such as the ongoing Russia-Ukraine war, said the BSP.
“A few analysts also cited the recovery of private consumption and government spending, depreciation of the peso against the US dollar, rising inflation expectations, as well as second-round effects, particularly higher utility rates and transport fares as some of the upside risks to inflation outlook,” it added.
The BSP said however that its monetary policy actions will “cool down” inflation, especially in the second half of 2023. This year’s forecast is higher mainly due to elevated prices of food, utilities, and transport as well as more pronounced second-round effects on rent and restaurants.
The BSP expects inflation to remain above-target until October this year. On a quarterly basis, the central bank forecasts inflation will average at 7.7 percent in the first six months of this year. By the third quarter, it should be at 5.4 percent and lower in the last quarter of the year at 3.8 percent.
In the BSP survey, it noted that “only a handful of analysts mentioned possible downside risks to inflation such as base effects” and also “heightened uncertainty on the recovery of the global economy, slow reopening of China and existing non-monetary measures by the National Government that are expected to help boost food supply and temper domestic prices.”