BSP likely to keep hawkish hold for rest of the year

The Bangko Sentral ng Pilipinas (BSP) is likely to maintain a hawkish hold for the rest of the year to support the economy, analysts said.

Diwa C. Guinigundo, the new country analyst for the Philippines of GlobalSource Partners, said consumer prices should not move beyond an average of 3.4% in the fourth quarter to achieve the BSP’s 5.8% full-year forecast. 

“This is going to be tough on both the BSP, which has correctly ruled out any policy rate easing for the rest of the year, and the National Government, which cannot seem to grab the ongoing rice crisis by the horns,” he said in a report dated Oct. 5.

Inflation soared to 6.1% in September, the fastest in five months, from 5.3% in August. Year to date, inflation averaged 6.6%, higher than 5.1% in the same period a year ago and still above the BSP’s recently revised 5.8% forecast for 2023.

“With this latest inflation outturn, and the BSP’s elevated inflation forecasts for this year and the next, we don’t see monetary policy shifting out of a pause, at least not this year,” Mr. Guinigundo said.

He noted that if risks to inflation continue to materialize, it is possible that inflation may go above the BSP’s revised 3.5% forecast for 2024 and could even breach the 2-4% target.

“Supply shocks may be persistent — and this is what we are seeing today. The failure to put in place non-monetary measures lifted the lid, and inflation returned with a vengeance,” he said. 

The Monetary Board has kept the benchmark interest rate at 6.25% since March after hiking borrowing costs by 425 basis points (bps) since May 2022 to tame inflation.

Asked if the Monetary Board would deliver an off-cycle rate increase due to the faster-than-expected September print, BSP Governor Eli M. Remolona, Jr. said in a Viber message on Thursday: “We haven’t decided. We’re still analyzing the data.”

Jeepney fare hike
The implementation of a PHP 1 provisional jeepney fare hike starting on Sunday is seen to add to inflationary pressures.

China Banking Corp. Chief Economist Domini S. Velasquez said the PHP 1 increase in jeepney fares will add about 0.17 percentage point to headline inflation.

“Since oil prices corrected, we hope that this would be the last of the fare hikes. The government can provide well-targeted subsidies to drivers and operators instead so that consumers need not worry of additional fare hikes,” she said.

If non-monetary measures are not enough to bring down headline inflation, the BSP could possibly opt for another rate increase this year, Ms. Velasquez said.

“However, we still think that actions to address supply and not curb demand would be more appropriate. Especially given a modest growth environment,” she said.

She added that the inflation data for October and the third-quarter gross domestic product (GDP) data will be the “deciding factors” at the Monetary Board’s next policy review on Nov. 16. 

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the BSP may pause next month if the third-quarter GDP report would reflect a “technical recession.”   

“Our new base case on rates sees 50-bp worth of cuts in the first quarter of 2024, followed by another 25-bp (cut) in the second quarter,” he said.

Third-quarter GDP data will be released on Nov. 9.

On the other hand, MUFG Global Markets Research Senior Currency Analyst Michael Wan said the higher-than-expected inflation print likely means that the BSP will hike at its next meeting “or even earlier in an off-cycle meeting, on the back of the BSP governor’s forward guidance.”

The Bank of America (BofA) also raised its inflation forecasts for this year to 6.1% (from 5.5% previously) and for 2024 to 3.5% (from 2.8%).

BofA Global Research said in a note dated Oct. 5 the BSP may opt for an off-cycle increase depending on the outcome of the US Federal Reserve’s meeting on Nov. 2 (Manila time), and the October inflation print to be released on Nov. 6.

“In our revised forecasts, a policy rate cut may not happen until the second quarter of 2024 and our year-end 2024 policy rate expectation is now higher at 5.5%, from previously 5.25%,” it added. — Keisha B. Ta-asan