BSP to hike rates by 25 bps this week – analysts

The market expects the Monetary Board, the decision-making arm of the Bangko Sentral ng Pilipinas (BSP), to raise the benchmark borrowing rate by 25 basis points (bps) on Thursday, March 23, which will bring the policy rate to 6.25 percent. Moody’s Analytics said since inflation is persistently high, the BSP would still need to raise the overnight reverse repurcase (RRP) rate to curb price pressures. “In the Philippines, the overnight reverse repo rate is expected to climb 25 basis points to 6.25 percent. The country is battling some of the stickiest inflation in the Asia-Pacific region; headline inflation nudged down only to 8.6% year on year in February from 8.7% in January,” it noted in a commentary. Both demand and supply-side factors are driving inflation, said Moody’s. The travel sector, for example, has pushed up prices for accommodation, restaurant meals and transport and impacting on the demand-side. As for supply-side factor, this is the higher gas and diesel costs. “With inflation still too high, BSP will want to prevent what it calls the ‘emergence of additional second-order effects’. However, the small easing in inflation in February, which contrasted with BSP's expectation for an increase, could give the central bank confidence to step it back,” said Moody’s. ING Bank senior economist Nicholas Mapa on Monday, March 20, said the March 23 rate hike could be the last one in a tightening cycle that started May 19, 2022, resulting to a 400 bps rate hike as of Feb. 16 this year. Mapa said the BSP may pause during its next policy meeting which is on May 18. “BSP likely doing a one-&-done with a pause likely at the May 18 meeting. If inflation slows further we could even see Gov (Felipe) Medalla cut RR (reserve requirement) if BSP does pause. RR cuts will only be carried out with inflation slowing after Gov Medalla learned hard lessons from 2018,” added Mapa. Meanwhile, in a market report released on Monday, First Metro Investment Corp. and its research partner, University of the Asia and the Pacific said domestic inflation likely has peaked in January. “(A) downswing should ensue, albeit not as fast as policy makers would like since it will likely remain above-8% in Q1 (first quarter) and above-7% in Q2,” said FMIC-UA&P analysts. The research arm of the Metrobank Group also expects inflation will fall below six percent in the third quarter due to “the high base in 2022 where the inflation rate accelerated from March to December.” As for the exchange rate, currently ranging at the P54-P55 level, FMIC-UA&P said: “While USDPHP rate bucked the region’s currency depreciation mode in February, this won’t last long due to the Fed’s renewed policy rate hiking and our country’s ballooning trade deficits, which hit a six-month high in January.” It also noted that the peso-US dollar rate has “inexplicably did not catch up to U.S. dollar’s strength from April to October and again since January 2023.”