Economists bet on one more rate hike

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to deliver one more rate hike this year after leaving key policy rates untouched last Thursday, economists said.

Nalin Chutchotitham, economist for the Philippines at Citi, said the Monetary Board may raise interest rates by another 25 basis points at the next rate-setting meeting scheduled on Dec. 14.

“To better anchor inflation expectations, we continue to see the possibility of one more hike this year, to 6.75 percent, and no rate cut in the first half of 2024,” Chutchotitham said.

Despite keeping rates unchanged, Chutchotitham said the BSP still appears very hawkish.

Chutchotitham said the November inflation would be the key data to watch.

“We still see potential increases in electricity fares leading to higher costs on goods, while the strong employment and wage hikes likely continue to support robust domestic demand expansion,” Chutchotitham said.

The BSP has raised interest rates by 450 basis points since May last year, including the 25-basis-point off-cycle hike on Oct. 26. This brought the benchmark interest rate to a fresh 16-year high of 6.50 percent, the highest since the 7.50 percent in May 2007.

Amid a rebound in gross domestic product (GDP) growth in the third quarter but slowing credit growth, Chutchotitham said the BSP appears to want to wait to assess its October rate hike on the economy.

“The BSP deems that rebound in the third quarter GDP shows that growth prospects remain largely intact, but pent-up demand continues to diminish in the near term. It also cited slowing credit growth and wishes to continue assessing private sector responses to tighter monetary policy conditions,” Chutchotitham said.

ANZ chief economist for Southeast Asia Sanjay Mathur and economist Debalika Sarkar said the Philippine central bank maintained its tightening bias and kept the door open for additional rate hikes depending on the income inflation data.

“Our current policy rate forecasts continue to reflect a 25-basis-point hike in the December meeting and a hold at least until end-2024. We will, however, revisit our forecasts after the release of the November 2023 inflation print in early December,” Mathur and Sarkar said.

Latest projections indicate that the inflation outlook has moderated over the policy horizon, prompting the BSP to lower its risk-adjusted inflation forecasts to 6.1 percent from the original target of 6.2 percent for 2023, 4.4 from 4.7 percent for 2024 and to 3.4 percent from 3.5 percent for 2025.

The risk-adjusted inflation is equivalent to baseline inflation forecasts plus the probable weighted impact of the different upside and downside risks to inflation outlook.

On the other hand, the BSP baseline inflation forecasts were raised to six percent from 5.8 percent for 2023 and to 3.7 percent from 3.5 percent for 2024, but lowered to 3.2 percent from 3.4 percent for 2025.

Inflation averaged 6.4 percent from January to October, still above the BSP’s two to four percent target range. It eased significantly to 4.9 percent in October after picking up pace for two straight months to 5.3 percent in August and 6.1 percent in September.

BSP Governor Eli Remolona Jr. earlier told participants in the Philippine Economic Briefing in San Francisco, California that the country is not “out of the woods yet” despite the slower inflation in October.

“We’re not out of the woods, but we’re within striking distance of our two to four percent target range. For 2024, I think we will, for most of the year, be between two to four percent. But maybe around April to July, (inflation) will approach the ceiling and maybe even exceed the ceiling,” the BSP chief said.

Euben Paracuelles, senior economist at Nomura, said the BSP is keeping its pledge to remain vigilant of inflation risks and stands ready to resume hikes as needed.

Paracuelles pointed out that the central bank cited signs of a moderation in the inflation outlook, whereas in the off-cycle meeting, it saw the need for urgent action “to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.”