BSP likely to maintain pause — poll

The Bangko Sentral ng Pilipinas (BSP) will likely hold interest rates steady for a fourth straight meeting on Thursday, amid slowing economic growth.

A BusinessWorld poll conducted last week showed 14 of 17 analysts expect the Monetary Board (MB) to maintain the policy rate at a near 16-year high of 6.25% despite the inflation uptick in August.

On the other hand, three analysts see the BSP raising borrowing costs by 25 basis points (bps) at the Sept. 17 meeting to preemptively ward off inflationary pressures. If realized, this would bring the target reverse repurchase (RRP) rate to 6.5%.

“I’m expecting the MB to hold (this week), despite the surprise uptick in inflation in August. I highly doubt the latest print will spook members into further action (i.e. another hike); it was well within their target range and their official response to the actual data was fairly nuanced and reasonable, expecting disinflation to resume going forward,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

Headline inflation unexpectedly quickened for the first time in seven months to 5.3% in August, but within the BSP’s 4.8-5.6% forecast range for the month. Inflation averaged 6.6% in the eight-month period.

“We expect the BSP to keep its policy rate steady at 6.25%. Concerns on growth will likely be front and center,” HSBC Global Research Association of Southeast Asian Nations (ASEAN) economist Aris Dacanay said in an e-mail.

Philippine gross domestic product (GDP) grew by a slower-than-expected 4.3% in the second quarter from the 7.5% a year ago.

For the first semester, GDP growth averaged 5.3%. This was well below the government’s 6-7% target for the year.

Mr. Dacanay said bank lending has also been growing at its slowest pace since the global financial crisis in 2009, barring the coronavirus pandemic in 2020.

BSP data showed outstanding loans of universal and commercial banks, net of RRP placements with the central bank, rose by 7.7% to PHP 11 trillion in July. Loan growth in July was the weakest increase since April.

Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said the temporary spike in prices last month is “transitory” and should not prompt another rate hike from the BSP.

China Banking Corp. Chief Economist Domini S. Velasquez said inflation expectations are still well anchored.

“We estimate that inflation could still be on track to reach the BSP’s 2-4% target range by the fourth quarter if domestic supply pressures are addressed in a timely manner,” she said.

Ms. Velasquez said the price ceiling on rice will likely help ease inflationary pressures for September. “Hopefully, the expected delivery of imported rice and harvest this end-September should help ease price pressures,” she added. 

A recent spike in rice prices prompted the Marcos administration to impose a price ceiling on regular milled and well-milled rice at PHP 41 and PHP 45, respectively, starting Sept. 5.

EYE ON FED
University of Asia and the Pacific (UA&P) Senior Economist Cid L. Terosa said the MB will also keep in mind the US Federal Reserve’s next policy decision.

The US central bank is widely expected to keep rates unchanged at the conclusion of its two-day meeting on Sept. 20.

Ms. Velasquez said the Fed could potentially bring its aggressive monetary tightening cycle to an end.

“If realized, this would maintain the current 75 bps interest rate gap and alleviate downward pressure on the peso,” she said.

The peso closed at PHP 56.815 on Friday, depreciated by five centavos from its previous finish of PHP 56.765 against the dollar. Year to date, the peso weakened by 1.8% or PHP 1.06 from its PHP 55.755 close on Dec. 29, 2022. 

“Nonetheless, the policy call will likely be a tough one. Risks to inflation are significantly tilted to the upside with global rice prices rising almost vertically by more than 20%,” HSBC’s Mr. Dacanay said. 

While food inflation may ease in September due to the rice price ceiling, he said the policy response after that is still uncertain.

“We think the BSP will first monitor what the final policy will be before considering a continuation of its tightening cycle. Nonetheless, there is a risk that the BSP preempts any second-round effects by hiking policy rates in anticipation of the price pressures ahead,” he said.

Meanwhile, Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co. said a 25-bp rate hike on Thursday will be a “calibrated preemptive response to inflation headwinds.”

Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez also expects a 25-bp rate hike due to rising prices of basic commodities, particularly agricultural products, as well as fuel.

From the second week of July to September, oil firms have raised fuel prices by PHP 9.85 per liter for gasoline, PHP 14.05 per liter for diesel and PHP 13.45 per liter for kerosene.

“Not to mention the impending surge in demand brought about by the forthcoming holiday spending. The increase in prices has affected not only food products but across all commodities in the market,” Mr. Lopez added.

Extended pause?
Alvin Joseph A. Arogo, an economist from the Philippine National Bank, said the BSP will likely keep borrowing costs steady for the rest of the year.

“This is appropriate given the relatively weaker economic growth outlook and inflation can still fall below 4% by the fourth quarter of 2023,” he said.

The BSP sees inflation averaging 5.6% in 2023, before easing within the 2-4% target to 3.3% in 2024 and 3.4% in 2025.

“If the currency continues to substantially weaken, however, then the central bank may need to temporarily sacrifice supporting expansion until the peso stabilizes. As such, a final 25-bp hike this year still has a fair chance of happening, whereas a rate cut is very unlikely,” Mr. Arogo said. 

Mr. Terosa said the BSP may take its cue from the US central bank’s next moves.

“Of course, unexpected policy decisions by the Fed in the remaining months of the year can pressure the BSP to change its policy stance,” he said.

Mr. Dacanay said the dollar may experience renewed strength in the coming months, putting pressure on the BSP to keep policy rates high for a longer period to support the peso.

“We continue to expect the BSP to only cut its policy rate only after the Fed cuts its own,” he said. 

Meanwhile, Mr. Chanco said there is still a “decent chance” the BSP will start cutting policy rates within the fourth quarter to support the economy.

“This is, however, contingent on inflation returning to the BSP’s target range in October or November,” he said.

After the Sept. 21 meeting, the MB’s next policy reviews are scheduled for Nov. 16 and Dec. 14. — Keisha B. Ta-asan, Reporter