THE Bangko Sentral ng Pilipinas (BSP) will likely raise key interest rates by another 25 basis points (bps) this Thursday as policymakers seek to address persistent inflationary pressures despite May’s slower-than-expected rise in consumer prices.
All nine economists polled by The Manila Times said the BSP’s policymaking Monetary Board would increase the benchmark rate, with seven forecasting a quarter-point hike to 4.75 percent during the June 18 meeting.
Two analysts expect a larger 50-bps increase, citing mounting upside risks to inflation and the need to prevent inflation expectations from becoming entrenched.
Latest inflation data has given the central bank some breathing room, with the overall rate of 6.8 percent slowing from 7.2 percent in April. Inflation, however, remains well over the BSP’s 2.0- to 4.0-percent target.
May’s slowdown was largely attributed to softer increases in transport costs following fuel price rollbacks, as well as slower growth in the prices of housing, utilities and some food items.
Despite the moderation, economists noted that underlying price pressures were continuing to build.
Following last week’s release of the May inflation data, the BSP said it would “take necessary actions to ensure inflation returns to its 3-percent target, in keeping with its primary mandate to ensure price stability.”
No need for aggressive hike
Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said the softer inflation reading likely removed the need for a more aggressive move.
“I’m expecting the [Monetary] Board to hike by 25 basis points, citing mainly the ongoing rise, however gradual, in core inflation,” he said.
“The fact that the headline rate for May was much softer than the BSP expected should take off the table a potentially more aggressive 50-basis-point increase,” he added.
Security Bank Corp. economist Angelo Taningco also expects a 25-basis-point hike, noting that inflation remains elevated while economic activity continues to show signs of weakness.
Factors supporting further monetary tightening, he said, include inflation remaining above target, a fragile labor market and sluggish domestic demand that has weighed on economic growth.
“We think a gradual and modest pace of monetary tightening is warranted in order to avoid steep borrowing costs from aggressive rate hikes, which would likely dampen loan demand and consumer spending and slow down an already weak economic growth,” Taningco said.
A similar view was expressed by UnionBank chief economist Ruben Carlo Asuncion, who said the BSP was likely to continue tightening via a quarter-point increase while remaining vigilant against inflation risks.
While headline inflation has eased, he said underlying pressures remain elevated, with core inflation expected to move higher in the coming months.
“The Monetary Board’s decision will likely be driven by the need to anchor inflation expectations, alongside risks from global commodities, particularly oil, and exchange rate movements,” Asuncion said.
“Overall, the BSP remains biased toward tightening as it balances softer headline inflation against forward-looking core inflation risks.”
Energy shocks to keep BSP on alert
Deepali Bhargava, regional head of research for Asia-Pacific at ING Economics, said food prices remained the primary driver of inflation and were becoming increasingly broad-based.
“Risks to the inflation outlook remain firmly skewed to the upside,” she said, adding that ING expects Philippine inflation to average 5.8 percent this year, well above the BSP’s target.
“In this environment, our base case for Thursday’s meeting is that a 25-basis-point rate hike is highly likely,” Bhargava added.
ANZ Research economist Kausani Basak similarly expects a quarter-point increase and also warned that inflation could remain above target for the rest of the year.
Basak said persistent oil price pressures and uncertainty surrounding tensions in the Middle East continued to threaten the inflation outlook, noting that second-round effects, wherein businesses pass on higher production costs to consumers, are likely to become more pronounced in the coming months.
“The BSP has underscored the need to prevent a de-anchoring of inflation expectations,” Basak said, adding that the central bank’s policy stance remains accommodative in real terms despite previous rate hikes.
China Bank Research also expects a second consecutive 25-basis-point increase, noting that elevated energy prices linked to the Middle East war and broadening price pressures in the services sector warrant further policy action.
It said the pace of tightening would likely remain measured, particularly after the softer May inflation print.
“Overly aggressive hikes also risk weighing on an economy already reeling from subdued consumer and business sentiments amid domestic and external headwinds,” China Bank Research said.
Philippine National Bank chief economist Alvin Arogo echoed this, saying a quarter-point increase will demonstrate the BSP’s commitment to achieving its inflation target.
He noted that core inflation breached the 4.0-percent level in May for the first time in 28 months, highlighting the persistence of underlying price pressures.
However, a larger increase will be difficult to justify given signs of economic stagnation and already tight financial conditions.
Jumbo rate hike seen
However, not all economists were convinced that a gradual approach will be sufficient.
Jonathan Koh, Asia economist and foreign exchange analyst at Standard Chartered Bank, expects the BSP to deliver a larger 50-basis-point increase that will bring the policy rate to 5.0 percent.
Koh said elevated inflation remained the central bank’s primary concern despite slowing economic growth.
While headline inflation eased in May, he pointed out that core inflation accelerated to 4.1 percent and that broader price increases are becoming evident across the consumer basket.
The continued depreciation of the peso, he added, has increased concerns over imported inflation and reinforces the BSP’s hawkish policy stance.
“We therefore expect BSP to retain a hawkish near-term bias, with a further 25 bps hike likely in August, taking the policy rate to 5.25 percent by end-2026,” Koh said.
HSBC Global Research senior economist Aris Dacanay also anticipates a jumbo 50-basis-point hike.
“We think that risks are tilted towards inflation more than growth,” he said.
Dacanay said the May moderation was largely driven by temporary factors such as lower oil prices and transportation costs and that more persistent threats remained on the horizon.
He warned that rising fertilizer prices and the effects of El Niño could intensify food inflation in the months ahead while renewed global energy market volatility could further complicate the inflation outlook.
“These shocks may be ‘supply-side’ in nature but managing FX (foreign exchange)-induced inflation in this environment will be key to ensure that the supply-side shocks do not spill over to inflation expectations,” Dacanay said.
“And to do so, having an aggressive monetary policy stance will be appropriate to mitigate FX volatility, more so with the risk of the Fed (US Federal Reserve) suddenly turning hawkish.”
The US central bank will be holding a two-day policy meeting beginning Tuesday. It is widely expected to hold rates steady.
