The hawkish Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), is expected to further tighten the benchmark rate to an 18-year high of seven percent or more from its current 6.5 percent to contain persistently high inflation, according to some economists.

ING senior economist Nicholas Mapa said, in an email interview, of the likelihood of further tightening by the BSP. In fact, he is also not ruling out a second off-cycle policy rate hike before the scheduled Nov. 16 Monetary Board policy meeting. 

If another unscheduled rate hike happens immediately after its Oct. 26 off-cycle decision, the BSP overnight target reverse repurchase (RRP) rate will likely exceed seven percent this year. 

“I expect at least one more possibly on or before the Nov 16 meeting. Given how hawkish (Governor) Remolona is, it looks like he can push rates past seven percent since inflation will not return to target next year either,” said Mapa in an email.

Generally, analysts closely watching the BSP have mixed sentiments on the direction of the policy rate, especially after BSP Governor Eli M. Remolona Jr. said Friday that it is still a toss up whether or not they will continue to lift rates this month. If they do raise interest rates again, this will be in reaction to a high October inflation and a slower-than expected economic growth in the third quarter.

But then Remolona also said they could opt for a pause in the next policy rate meeting, depending on what data they will have to deal with.

Mapa said he expects growth “to grind slower in reaction” to the rate adjustments adding,  “We are not optimistic we can see a significant reduction in inflation due to supply side conditions.”

“Given the outlook for inflation and my own expectation that inflation will remain elevated despite additional tightening unless supply remedies are implemented, BSP can hike rates further in a bid to corral inflation expectations by slowing growth considerably to hit domestic demand substantially to lower demand side pressures,” he said.

The BSP is expected to release its October inflation forecast on Oct. 31. The government will announce the October consumer price index (CPI) on Nov. 7 and the latest GDP report on Nov. 8.

'No Rate Hike' analysts

Two commentaries from US bank Citi, and British financial and economic research firm Pantheon Macroeconomics, indicated their own assessment that BSP will no longer adjust the target RRP rate in November and December.

“To be clear, we still think that the meetings next month (November) and in December will see no rate action, as the next few key releases should quell the BSP’s hawkish inclination,” according to Pantheon in an Oct. 30 weekly monitoring report.

But, it said, “we are maintaining our end-2024 rate forecast of 5.50% too, implying a more pronounced unwinding of one of the region’s most aggressive rate-hiking cycles, which could start as early as February, if our relatively benign outlook for inflation and downbeat view on growth prove accurate.”

Citi economist Nalin Chutchotitham said they will also keep its previous forecast that BSP may be already done in raising interest rates and could maintain the current 6.5 percent key rate until the end of the year and up to the first six months of 2024.

However, she said that they “see risks of further rate hikes” but also notes that since the BSP refrained from deciding to go for a 50 basis points (bps) rate increase on Oct. 26 and opted for a smaller 25 bps instead, this “suggests that the BSP still have some reservations and are keeping options open, especially if Q3 GDP (third quarter gross domestic product) disappoints again.”

Chutchotitham said the BSP could raise the RRP rate some more should the October inflation and the third quarter GDP will show a “need for the BSP to further tighten monetary policy in order to put the brakes on domestic demand and thus demand-pull price pressures.”

BSP's preemptive policy stance

HSBC Global Research in a commentary after the Oct. 26 off-cycle rate hike said it was a preemptive move to deal with second-round effects of higher rice and fuel prices. But, the British bank said “we think the BSP will keep its policy rate steady but remain very hawkish as headline inflation will likely remain sticky” until the second quarter 2024 as has been communicated by the BSP

As of end-September, the country’s CPI stood at 6.6 percent, way above the two percent to four percent inflation target for 2023 until 2025. The CPI has been above target for 18 months.

HSBC said BSP will likely keep its policy rate steady at 6.5 percent in the November and December Monetary Board meetings. “After all, core inflation is still threading downwards, which means the BSP's tight monetary stance is already in the works. Since the off-cycle hike is pre-emptive in nature, we don't think the BSP will hike interest rates in its November rate-setting meeting, even if the Fed (US Federal Reserve) hikes in November,” it added.

Meanwhile, analysts from Bank of the Philippine Islands’ (BPI) Research said the BSP needed to do an unscheduled rate hike to protect its “credibility as an inflation fighter”.

“The rate hike is a statement from the BSP that it is determined to bring inflation back to its target. Inflation expectations may shoot up further if the market doesn’t see any action from the BSP. It might hurt the BSP’s credibility and make it more difficult to bring down inflation,” said BPI.

Similar with other economists, BPI analysts also cannot discount another rate hike on Nov. 16, emphasizing that “the decision of the BSP will depend on the upcoming data, as well as the behavior of the exchange rate. An inflation print significantly higher than 6.1% (for the month of October) might trigger another rate hike in that meeting.”

Inflation to remain high until 2024

One of the key factors that Remolona gave as to the reason for the off-cycle rate hike was that they saw an “urgent” need to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations. The last time the BSP hiked the key rate in an off-cycle decision was on July 14, 2022 of 75 bps.

Remolona said the BSP no longer expects headline CPI to return to within the two percent to four percent target range this year, and he sees above four percent inflation from March to July next year.

In its latest report however, Pantheon economists said they still think a below four percent CPI is possible at the close of 2023.

“We continue to believe that a return to target-range inflation by year-end is possible, with the upcoming inflation report set to mark a U-turn in the recent re-acceleration of the headline rate,” said the UK-based firm.

It forecasts October inflation to decline to 5.3 percent from September’s four-month high of 6.1 percent “as the reversal of the August surge in rice prices finally filters through”.

Last Friday, Remolona said October CPI could still be on the high side and maybe closer to the September rate of 6.1 percent. But, he said they could decide to hold the 6.5 percent target RRP rate on Nov. 16, depending on the data.

The Monetary Board, in raising the key rate by 25 bps last week, has noted that second-round effects “broadened” because of  transportation fare increases and minimum wage adjustments.

Remolona said inflation expectations have also risen sharply, highlighting the risk of further second-round effects.

The BSP will revise its Sept. 21 CPI forecasts for 2023, 2024 and 2025 on Nov. 16 which is the scheduled policy rate meeting. It has a current average inflation forecast of 5.8 percent for 2023.

On the day it executed an off-cycle rate increase, the BSP disclosed a risk-adjusted forecast for 2024 of 4.7 percent, up from its previous risk-adjusted forecast of 4.3 percent, but still higher than the target range.

Based on BSP data, the last time the RRP rate stood at 6.5 percent was in 2005. If the BSP raises it more to seven percent, then the Monetary Board is poised to adjust the key rate to its highest level since August 2005.

The BSP became an inflation-targeting central bank in January 2002. At the time, for most of 2002 the RRP rate was at seven percent. The highest rate was at 7.5 percent in October 2005 and then again for most of 2007 until the BSP adopted a tiering system on placements and adjusted the policy rate to six percent in July 2007.

By 2016, the BSP revised its monetary operations with the adoption of the interest rate corridor system to “generate a more effective policy signal as market rates closely track the policy target rate.” This is when the BSP introduced auction-type liquidity management operations.