Further rate hikes may have limited impact on inflation — analysts

Further rate hikes by the Bangko Sentral ng Pilipinas (BSP) may have limited impact on inflation and would likely slow economic growth, analysts said.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said another rate hike at this point will not likely impact inflation in a “substantial” way.

“What rate hikes will be effective in carrying out would be a broad-based slowdown in growth momentum,” he said in a note.

BSP Governor Eli M. Remolona, Jr. on Wednesday said he is not ruling out a 25-basis-point (bp) increase at the Monetary Board’s next policy review on Nov. 16.

The BSP has kept the key interest rate at a near 16-year high of 6.25% at its last four meetings. Another 25-bp rate hike will bring the benchmark rate to 6.5%.

Last week, National Economic and Development Authority Secretary Arsenio M. Balisacan warned that further monetary tightening could hurt the economy and consumers who are already struggling from high inflation.

Mr. Mapa noted higher borrowing costs would affect bank lending, which is linked to capital formation and gross domestic product (GDP) expansion.

“We believe the net result of additional tightening would be much slower growth, with only a modest impact on inflation but only after growth slides to multi-year lows,” he said.

ING Bank lowered its Philippine growth forecast to 4.7% (from 4.8% previously) for this year and to 4.5% (from 4.7%) for 2024. Both estimates are below the government’s 6-7% and 6.5-8% target for 2023 and 2024, respectively.

In an e-mail, University of Asia and the Pacific Senior Economist Cid L. Terosa said rate hikes will be effective in quelling inflation only if inflation is demand-driven, noting that the current inflation is driven by supply constraints and geopolitical tensions.

“In the Philippines, businesses and investments are more sensitive to interest rate hikes than consumers. Hence, the net effect of rate hikes on economic growth in the Philippines tends to be negative. It appears that the negative impact of interest rate hikes and inflation rate on economic growth in the Philippines can extend over the long term,” Mr. Terosa said.

Headline inflation accelerated for a second straight month to 6.1% in September from 5.3% in August as food and transport costs surged. September marked the 18^th straight month that inflation exceeded the central bank’s 2-4% target. Year to date, inflation averaged 6.6%.

Further tightening
ING’s Mr. Mapa said the BSP will likely resume monetary tightening only to secure the inflation path in 2024, as market players are not pricing in a rate hike by the US Federal Reserve and the peso remains steady against the dollar.

“With 2023 winding down, any rate hike today would only have an impact on the 2024 inflation outlook.  We believe Mr. Remolona will pull the trigger on a rate hike in the near term, possibly after the October inflation report, a potential Fed rate hike or at the November BSP policy meeting,” he said.

Any rate hike would demonstrate the BSP’s commitment to fight inflation, anchor inflation expectations and tame second-round effects by “snuffing out” pressures from the demand side, Mr. Mapa said.

Mr. Terosa said the continued rise in prices may still prompt the Philippine central bank to hike rates, Mr. Terosa said.

“Aside from rate hikes, the government should explore solutions that will ensure stability in the production and supply of key commodities,” he added.

Meanwhile, DBS Bank Senior Economist Radhika Rao said rising prices of food and fuel can “unhinge” inflationary expectations.

“Our base case is for a pause till yearend but the odds of an inter-meeting hike or at the scheduled review has increased after the September inflation release as well as pipeline risks of further adverse weather pushing by food inflation,” she said.

“The FOMC (Federal Open Market Committee) review in early-November might also sway the timing and likelihood of further tightening by the BSP,” she added.

The US Federal Reserve opted to keep the target Fed funds rate unchanged at 5.25-5.5% at its meeting last month. The FOMC is scheduled to meet from Oct. 31 to Nov. 1 to discuss policy. — Keisha B. Ta-asan, Reporter