With the economy growing better than market consensus, analysts said the market will not be surprised if the Bangko Sentral ng Pilipinas (BSP) tightens monetary policy anew to control upside risks to inflation.
“We think the BSP has room to hike rates if big upside risks to inflation emerge,” said HSBC Global Research analysts in a commentary Wednesday, Jan. 31, following the government’s announcement of a 5.6 percent fourth quarter gross domestic product (GDP) growth for 2023, which brings the full-year GDP outturn to 5.6 percent, below the state target of six percent to seven percent but higher than market consensus of 5.4 percent to 5.5 percent.
British bank HSBC is only echoing what BSP Governor Eli M. Remolona Jr. already signaled to the market that the central bank has the option to raise the key rate further amid strong and sustained GDP growth. The target reverse repurchase (RRP) rate or the policy rate currently stands at 6.5 percent.
The BSP’s policy-making arm, the Monetary Board, is scheduled to meet on Feb. 15 for its first policy meeting for the year.
HSBC thinks the BSP would decide on a pause on Feb. 15 with an “impressive” 2023 growth. The bank had predicted five percent fourth quarter GDP growth and full-year growth of 5.4 percent. On a seasonally adjusted basis, the fourth quarter GDP expansion of 5.6 percent increased by 2.1 percent from the adjusted six percent growth in the third quarter.
Meanwhile for 2024, HSBC forecasts 5.3 percent GDP growth, much lower than the government target of 6.5 percent to 7.5 percent.
At 5.6 percent full GDP growth, HSBC said the Philippines may have reported the highest GDP growth in the region if Indonesia will not release a better number next week.
“Despite the odds, the Philippines is well-positioned to have become ASEAN's fastest growing economy in 2023. It saw the fastest inflation rate in ASEAN and the most aggressive tightening cycle made across the region's central banks. But the archipelago only flinched as it continued to sprint, growing above market expectations for majority of the year. Yes, full-year growth was below trend at 5.6%, but it was impressive, all things considered,” said the HSBC.
The bank’s analysts said with higher-than-consensus growth, the hawkish BSP “has room to tighten policy further if upside risks in inflation emerge.”
“However, we don't think the 4Q 2023 print was high enough to warrant a rate hike in the February rate-setting meeting. The BSP Governor affirmed this when he mentioned his readiness to hike rates further if 4Q growth accelerated from the previous quarter - which it didn't,” said HSBC.
Analysts also noted that if inflation in the first half of the year decelerates further which HSBC expects, then the BSP is believed to favor a hold stance for sometime, and keep the key rate at 6.5 percent.
“The BSP will only do its first rate cut at the same time as the Fed (US Federal Reserve). Our baseline is for the Fed to begin its easing cycle in 2Q 2024,” it added.
Remolona said last week that a strong 2023 GDP expansion may allow the Monetary Board some space to adjust the key rate higher.
He has always said that the economy can absorb BSP’s higher policy rate. Remolona said his basis was the neutral rate which showed them that the economy can absorb the 6.5 percent RRP rate.
Computing the neutral or the real rate is arrived at by subtracting the current inflation rate to the key rate of 6.5 percent.
With a 6.5 percent policy rate and the latest inflation of 3.9 percent for December, the neutral rate is at 2.6 percent which indicates that the benchmark rate still has some room to increase without affecting growth.
Last year, the inflation rate averaged at six percent, way above the target range of two percent to four percent.