BSP Preview: Turning on the rate hike switch

Energy-fueled acceleration in inflation will likely play a role in the next monetary policy meeting of the Bangko Sentral ng Pilipinas (BSP).

Metrobank expects policy makers to deliver a 25-basis point (bp) rate hike amid accelerating price growth from the effects of the conflict in the Middle East.

Consumer prices rose 4.1% on a year-on-year in March, largely driven by higher diesel and gasoline prices due the conflict in the Middle East.

Last year’s slow inflation and higher oil prices spilling over to costs of goods and services will likely further fan price growth this year. Inflation persisting above the BSP's target range creates room for higher policy rates.

In an off-cycle monetary policy meeting in March, the BSP kept its key policy rate at 4.25%.

While BSP Governor Eli Remolona had said that monetary policy has limited impact on oil prices, he acknowledged that the effects of higher interest rates on economic growth may be tempered by stronger government spending.

Metrobank expects the BSP to raise the key policy rate by 25 bps to 4.50% next week. This widens the difference between the Philippine and US policy rates to 75 bps.

Despite the wider interest rate differential, safe haven demand for the dollar may continue to drive USD/PHP movements as a resolution to the conflict remains to be seen.

Higher oil prices and their knock-on cost impact beginning to bite, along with quickening rice inflation suggest build the case for the BSP to raise interest rates further. As such, another rate hike may be delivered in June.

YOSHITAKA HIRAKAWA is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he constantly seeks new sights, sounds and experiences, from cliff jumping to trying new cuisines.