Analysts are divided in their forecasts on whether the Bangko Sentral ng Pilipinas (BSP) will further lift the current 6.5 percent policy rate next week or not given the slower October inflation.
Analysts from Citi said they still expects the central bank to raise the policy rate on Nov. 16.
Meanwhile, Bank of the Philippine Islands (BPI) analysts predict the BSP will likely hold its current interest rate of 6.5 percent in next week’s Monetary Board policy meeting and HSBC agrees.
In a commentary Friday, Nov. 10, Citi is predicting another 25 basis points (bps) rate hike on Nov. 16 which will bring the key rate to 6.75 percent. It noted that the strong gross domestic product (GDP) growth of 5.9 percent in the third quarter will convince the Monetary Board to hike anew.
“We now expect the BSP to hike once more, by 25bp to 6.75% (with 70% probability) next week. The significant upside in GDP growth and the BSP's expectation of 2024E (estimate) inflation exceeding target for the third year likely tilt the BSP's decision towards a hike, despite downside surprise of Oct (October) inflation,” according to Citi.
Both data that BSP is dependent on when it comes to deciding its next monetary stance showed better-than-expected numbers. The October consumer price index (CPI) dropped to 4.9 percent from 6.1 percent in September while GDP expanded higher than predicted by most at 5.9 percent versus consensus of 4.7 percent.
Citi has revised higher its 2023 GDP forecast for the Philippines to 5.5 percent from its previous estimate of 5.2 percent. For next year, it also raised its GDP growth projection to six percent from its earlier forecast of 5.9 percent.
For the fourth quarter GDP, the US bank forecast 5.2 percent while it expects the BSP to continue its tighter monetary policy until the first half of 2024 which will “likely cap domestic demand’s acceleration.”
“While we note still some mixed signals from household consumption,and our own inflation forecast for 2024 is lower than 4%, we think overall growth trend remains sufficiently robust, and likely keeps the BSP worried on inflation risks and inflation expectations. As we have previously noted, one uncertainty remains with the potential continued rise in electricity fares (and hence higher business costs), which are expected through 2024 after the court’s ruling on generation charges,” said Citi.
BPI took note of the fact that once again, with the unexpected high third quarter GDP growth, the Philippines is again touted as the fastest growing economy in the ASEAN trade bloc.
“The consumer base of the Philippines has remained resilient despite the elevated inflation, offsetting the impact of global uncertainties especially on trade,” it said. Nevertheless, BPI said the elevated inflation “may continue to dampen consumer demand, although a recovery is possible in the 4th quarter if inflation goes down further.”
The Ayala-led bank forecasts GDP will grow by 5.8 percent this year. Given this projection, it said the favorable October CPI may convince the BSP to keep its key rate unchanged at 6.5 percent.
“However, it is still premature to assume that the hiking cycle of the central bank is finally over. Upside risks to inflation continue to be significant, and inflation can easily bounce back as we have seen in recent months,” said BPI.
It added that an “escalation of the conflict in the Middle East will likely lead to higher oil prices, which can easily translate to higher inflation” and this could threaten the 2024 and 2025 inflation outlook.
If the BSP does decide to end the year with a higher interest rate of 6.75 percent, BPI said the “better than expected growth rate of the country supports our view that the economy has the capacity to absorb the rate hikes of the BSP and the central bank has the room to adjust its rate further especially if inflation remains sticky.”
British bank HSBC said Friday they expect the BSP to maintain current benchmark rate. It also expects that BSP will be reducing banks’ reserve requirement in the third quarter of 2024 instead of earlier.
After its Oct. 26 off-cycle rate increase, HSBC said BSP “can catch its breath” as they see “no urgent need to hike again.”
“We expect the BSP to keep its policy rate steady at 6.50% in the Monetary Board meeting next week. Headline CPI in October surprised many, including the BSP itself, by decelerating faster than expected at 4.9% y-o-y. In addition, the USD-PHP, which has been tirelessly attempting to breach 57 for more than two months, has finally relaxed - returning back to 56 right after the Fed (US Federal Reserve) decided to keep its policy rate unchanged in November,” said HSBC.
Since inflation has stayed above-target or above four percent in the last 19 months, HSBC said the BSP “will likely keep its guard up with inflation risks still tilted heavily to the upside” with a “headline CPI (expected) to accelerate in 1Q 2024 and average above 4% in 2Q 2024”.
“This will likely resume the discussion of tightening monetary policy further, but growth concerns should already bear more weight by then,” added HSBC.
As for the BSP’s reserve requirement ratio (RRR), the bank said they expect an RRR cut by the third quarter next year because the BSP has to remain hawkish for a longer period to curb high inflation.
“We previously expected the BSP to cut the RRR when headline CPI returns to target from 4Q 2023 to 1Q 2024. But with retail rice prices still elevated, there is a risk that this window of low inflation is shortened. To avoid confusing the market regarding its hawkish stance, we now think the BSP will postpone its agenda of cutting the RRR further to a period when inflation is better contained but before or simultaneous with the BSP's first rate cut,” said HSBC.