BSP unlikely to be aggressive in raising rates – think tanks

MANILA, Philippines — The central bank is unlikely to be aggressive in raising interest rates as inflationary pressures are seen easing and recovery is likely to be weak in the second half.

In separate economic briefs, international think tanks Pantheon Macroeconomics and Capital Economics are in unison that the Bangko Sentral ng Pilipinas (BSP) will not be aggressive in raising rates and that the tightening cycle will conclude by the end of this year.

This is in contrast to market expectations that three more rate hikes will happen and that such a scenario will continue until next year.

During Thursday’s policy meeting, the BSP delivered its first rate hike in more than three years with 25 basis points, bringing the benchmark rate to 2.25 percent from an all-time low of two percent.

The BSP raised rates amid the stronger-than-expected first quarter economic performance and elevated inflation.

But Pantheon chief emerging Asia economist Miguel Chanco and Alex Holmes of Capital Economics said the economy would likely slow down in the next quarters while inflation would start to slow later in the year.

“For now, we reckon that the BSP will hike just one more time this year, most likely at their next meeting in June,” Chanco said.

“Both the pace of the recovery and the strength of price pressures will ease. As the boost from reopening fades, headwinds to the consumption-led economy from higher prices and tightening financial conditions will begin to dominate. As such, the BSP’s tightening cycle is unlikely to be aggressive,” Holmes said.

Chanco said that after another rate hike later in the year,  the  BSP will tighten twice by 2023 to bring the overnight reverse repo rate to three percent.

Holmes, on the other hand, expects the policy rate to end at 2.75 percent this year, with just one hike each over the next two quarters, with no more tightening by 2023.

Both economists agree that inflation will change substantially in the months ahead.

Chanco said the headline rate would peak this month while Holmes said it could hover above five percent as the recent jump in global commodity prices feed through into higher fuel and utility prices and that a stronger economy drives an increase in core pressures.

But Holmes said the inflation should start to fall back as global commodity prices ease and a low base from the first half of 2021 slips out of the annual comparison.

The BSP already raised its inflation assumption for the year at 4.6 percent from the earlier 4.3 percent projection.