Poll: BSP poised for rate hike despite growth concerns
The Bangko Sentral ng Pilipinas (BSP) is likely to hike interest rates for a third straight meeting this week, with persistent inflation and peso weakness keeping the case for tighter policy strong despite concerns over weak economic growth.
Of the 15 economists surveyed by the Inquirer, 11 expect the Monetary Board to deliver a quarter-point rate hike at its Aug. 27 meeting, potentially bringing the benchmark rate to 5 percent.
This would extend the tightening cycle that began in April and bring cumulative rate increases to 75 basis points.
The remaining four expect the BSP to keep the policy rate unchanged at 4.75 percent.
Jun Neri, lead economist at Bank of the Philippine Islands, said inflation risks were still tilted to the upside despite recent deceleration. He expects a 25-basis-point hike.
“Near-term risks are concentrated in food and energy. Adverse weather remains a key concern, with habagat-driven monsoon rains and flooding raising the risk of further crop damage just as food supply conditions were beginning to stabilize,” Neri said, also citing a potential Super El Niño, wage hikes and second-round effects as risks.
“Meanwhile, oil prices remain volatile as US-Iran talks swing between de-escalation and renewed tensions, while rising producer prices in China add another channel for imported cost pressures,” he added.
The central bank is weighing above-target inflation against a weakening economy, with BSP Governor Eli Remolona Jr. signaling last week that they would take a less aggressive approach to monetary tightening.
Inflation has eased for three straight months, reaching 6.2 percent in July, but remains well above the BSP’s 3-percent target. Meanwhile, economic growth slowed further to 2.3 percent in the second quarter.
Higher borrowing costs are intended to curb spending by households and businesses, helping ease inflationary pressures but also weighing on economic activity.
But Neri said pausing could allow inflation expectations to become less anchored while leaving supply constraints unresolved.
“The binding constraint on Philippine growth is increasingly structural rather than cyclical, with governance challenges also weighing on economic activity, something monetary policy cannot remedy,” he said.
Aris Dacanay, economist at HSBC Global Investment Research, pointed to peso weakness as another reason for a rate hike, with the local currency recently hitting a record low of 61.98 against the dollar a week before the scheduled meeting.
“The BSP could, therefore, help stabilize the peso by building a buffer against potential Fed action through rate hikes. This would be helpful since the spread between the BSP and Fed policy rates, in real terms, is currently minimal, if not flat,” Dacanay, who also forecast a quarter-point increase, said.
Dacanay added that a rate hike could help the central bank avoid dipping into its reserves to intervene in the peso market.
Meanwhile, Chinabank expects the BSP to pause this week, saying it has limited room to tighten further.
“The case for a hold is getting stronger because the economy is already operating below potential, leaving little evidence of demand-driven inflation that would warrant another immediate hike. At most, we see room for one more hike, which the BSP can reserve for Q4 if inflation risks intensify,” Chinabank said.
Miguel Chanco, chief emerging Asia economist at Pantheon, shared the same view and expects headline inflation to return to target next year.
“The Board is claiming to be more data-dependent these days and since its last meeting, the inflation numbers have surprised to the downside[relative to consensus], as did the Q2 GDP print, which to us suggests that a hold, at least for now, would be the prudent position to take,” Chanco said.
“Clearly, the worst of the inflation spike from the war is over, and the economy is still battling with an ongoing slowdown in headline growth,” he added.
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