With emerging supply shocks, the Bangko Sentral ng Pilipinas (BSP) will likely raise the benchmark rates not once but twice before the year ends, hinted BSP Governor Eli M. Remolona Jr. on Friday, Sept. 22.

In an interview with Bloomberg TV, Remolona has indicated that the possible rate hike he signaled for the Nov. 16 Monetary Board policy meeting may not be the last if inflation and price pressures will persist in the last three months of the year amid transport fare and electricity rate increases.

“We’re not convinced it would be the last one,” he said, in reply to Bloomberg’s question if the November rate hike is the last one in the tightening cycle. “It won’t be the last hike in the cycle. We’re not convinced of that,” he added.

Depending on the inflation data that will come out in September, October and November, the BSP is likely to lift the target reverse repurchase (RRP) rate by 25 basis points (bps) on Nov. 16 and another 25 bps on Dec. 14 which is the last policy meeting for 2023. If this happens, the final end-year BSP policy rate will be 6.75 percent from its current 6.25 percent.

Remolona reiterated what he said on Sept. 21, the day the Monetary Board met to decide on the target RRP rate, that while the August inflation was higher than anticipated at 5.3 percent versus July’s 4.7 percent, it was not enough for a BSP rate increase despite that upside risks have become “more likely than usual.”

With persistent upside risks, he said -- “that to me means there’s a good chance for a hike next time. So we’ll see, we’ll have to watch the numbers.”

One of the biggest supply shock concerns are transport fare hikes “and it’s very likely it will go through,” he noted, since the petitions for the proposed increase have been filed. The other worry is the increase in electricity rates.

“Those two things could add something like 0.5 percent to the forecast of inflation for 2024,” he said.

From the Sept. 21 policy decision, the BSP adjusted upwards its inflation forecast for 2023 to 5.8 percent versus its August projection of 5.6 percent, following the higher August inflation, oil price hikes and depreciation of the peso.

The 2024 inflation forecast is also now higher at 3.5 percent from 3.3 percent while the 2025 estimate is maintained at 3.4 percent.

The petition for a minimum P5 transport fare hike will be discussed by concerned state agencies on Sept. 26. Meanwhile, power company Manila Electric Co. has announced that for this month, residential customers consuming 200 kWh will see a higher electricity bill of around P100.

Remolona said inflation will likely stay elevated in September and October but is still confident the consumer price index (CPI) will fall within the target range of two percent to four percent by November this year.

“The supply shocks seem to dissipate fairly quickly but the problem is there tend to be new supply shocks. The lags from supply shocks on inflation seems to be relatively short except they seem to be relentless. They keep coming. It keeps our inflation rates high,” he said.

Economists agreed the BSP will likely raise the policy rate higher in the last quarter, citing as reasons the tariffs issue on rice and the recent uptick in global oil prices.

HSBC in a commentary said, “we continue to expect the BSP to raise the policy rate to 6.50% in 4Q23 unless the tariff rate on rice is reduced sufficiently to pre-empt any supply shock on rice.”

HSBC said that in the coming months of October to December, there are two potential events that could trigger the BSP to tighten the monetary policy stance once again.

One is the US Federal Reserve which signaled its own rate hike late this year and the other is the rice issue.

HSBC said the BSP will “hike its policy rate by 25bp to 6.50% in 4Q 2023 if domestic rice prices spike again after the price cap is lifted by end-September.”

It added, “whether rice will be inflationary or not will depend on how much the tariff rate on rice is reduced after the cap is lifted.”

Bank of the Philippine Islands (BPI), in its own commentary, said it is now less certain that the CPI will return to the target range by the fourth quarter this year. It also gave as reasons the rice concern and oil price hikes.

“While not our central scenario, August’s print showed that there is a significant chance that inflation could still settle above 4% by December. The upcoming harvest season for rice may help in stabilizing the price of the commodity,” the bank noted. However, it added that local production can only cover around 85 percent of rice consumption and the country needs to import the rest from abroad.

“We cannot rule out another hike this year since inflation can accelerate again in the next 3 months especially with El Nino on the horizon. If the FOMC hikes again in November and both September and October PHL inflation prints continue to exceed 4%, BSP might be compelled to hike one more time before 2024,” said BPI analysts.

Citi Research, for its part, does not expect the BSP to increase its target RRP rate because of a slowing economy and increasing real rates.

“We maintain our call for no further rate hikes, given concerns over economic slowdown (and disappointing Q2 GDP), which are likely to help reduce core and services inflation further in the coming months,” said Citi.

It added that while rice prices remained “sticky”, they expect oil prices will ease in the fourth quarter.

“In our view, the chances of a further 25bp rate hike could increase if inflation rates turned out to be significantly higher than expected during Sep-Oct 2023, pushing the BSP’s projection for 2024 inflation above its current estimate of 3.5%. Aside from commodity price changes, the extent of economic slowdown would likely play a critical role in helping the BSP decide whether it should hike further,” said Citi.