The inflation-targeting Bangko Sentral ng Pilipinas (BSP) is expected to raise the policy rate by 25 basis points (bps) to 4.5 percent to confront war-driven price hikes head-on, according to investment banking giant Goldman Sachs.

“Given its price stability mandate, we believe the BSP will hike rates to contain inflation and keep inflation expectations anchored,” Goldman Sachs Economics Research said in an April 17 report obtained by Manila Bulletin.

The BSP’s Monetary Board (MB) will tackle the monetary policy stance on Thursday, April 23, with private-sector economists divided in their expectations of either the central bank standing pat or hiking interest rates.

Goldman Sachs noted that since the off-cycle MB decision that kept key rates steady last month, inflation has picked up markedly, fueled by rising fuel costs and now exceeding the BSP’s target range.

Headline inflation soared to a 20-month high of 4.1 percent year-on-year in March amid a global oil price and supply shock caused by the war in the Middle East.

“Other underlying and forward-looking inflation indicators have also firmed,” Goldman Sachs said.

The investment bank had earlier forecast that the elevated March inflation rate, which climbed past the government’s two- to four-percent target band of manageable annual price increases deemed supportive of economic growth, would pave the way for a total of 50 bps in BSP rate hikes during the second quarter.

The MB’s other monetary policy decision for the second quarter is slated on June 18, although BSP Governor Eli M. Remolona Jr. earlier did not discount the possibility of more frequent off-cycle policy meetings to keep interest rates attuned to the volatile war situation.

Goldman Sachs earlier flagged the “sharp rise” in the month-on-month March inflation print at 1.6 percent versus February price levels.

National Statistician and Philippine Statistics Authority (PSA) chief Claire Dennis S. Mapa had told Manila Bulletin that the seasonally adjusted month-on-month inflation in March was the highest in the PSA’s 2018-based series.

This means price levels last March jumped from February levels at the fastest pace as the war in the Middle East raged on.

While Goldman Sachs sees some relief from the Department of Trade and Industry’s (DTI) agreement with local businesses to freeze prices of basic necessities, which had been extended until May 10, the bank warned that “after that, the economy could see a broad-based increase in the prices of frequently purchased, highly visible consumer goods.”

“Looking ahead, these factors raise the risk of a broader cost pass-through to CPI [consumer price index] components beyond transport fuels,” Goldman Sachs warned.

Mapa had told Manila Bulletin that over 36 percent of the CPI basket is directly or indirectly vulnerable to rising oil prices. Energy items such as transport fuels, electricity, liquefied petroleum gas (LPG), and kerosene—accounting for 8.23 percent of the CPI—are most directly affected, while agricultural products, meals outside the home, and road passenger transport, which together make up about 28 percent of the CPI, may face secondary impacts from higher transport and raw material costs.