No pause in BSP rate hikes on horizon as risks remain

With inflation in the Philippines widely expected to have reached a peak in December 2022 but receding slowly in the following months, the Bangko Sentral ng Pilipinas (BSP) is seen to remain hawkish, to take its cue from the US Federal Reserve and raise its policy rate but more slowly in February.

New York-based research firm Global Source Partners believes that the rate of growth in prices of goods and services in the Philippines will tend to be higher than forecasts, mainly due to upward pressure from food and electricity supply as well as possible further wage and transport fare hikes.

This echoes the BSP, which said last week that upside risks continued to dominate the inflation outlook up to 2023, mainly stemming from elevated international food prices buoyed by high fertilizer prices and supply chain constraints.

Elevated inflation

“While the inflation rate will remain elevated for most of 2023, we share the BSP outlook of a likely downtrend in the headline rate in the coming months and a return within the 2 to 4 percent target later in the year,” GlobalSource said.

Still, the group expects full-year inflation this year to register above-target at 4.8 percent.

“The risks to domestic inflation, coupled with the US Fed’s continuing hawkish tone, will keep the BSP watchful and more likely in the near term to follow the Fed’s lead,” GlobalSource said.

The Monetary Board is scheduled to hold the first of eight meetings this year on Feb. 16.

The Netherlands-based ING Bank said that while the 8.1-percent inflation in December was “likely the peak,” it believes that price pressures are now more broad-based considering that even the group of goods that are not affected by seasonal upticks were also showing an uptrend.

Resurgent demand

ING Bank noted that core inflation “surg(ed)” to 6.9 percent in December.

Meanwhile, resurgent demand reflected in the stronger-than-expected gross domestic product growth, fanned inflation even further with notable increases in inflation for the services sector, ING Bank said.

“All of these suggest that despite inflation peaking late last year, we could see inflation face only a slow grind lower in 2023,” it added.

“Given our expectation for inflation to be sticky on the downtrend, we expect the [BSP] to remain hawkish in early 2023,” ING Bank said. “We could see BSP roll out additional rate hikes to match moves by the Fed.”

GoldmanSachs, also based in New York, sees the Monetary Board raising the BSP policy rate by 0.25 percentage point each in February and March.

This would bring the policy rate to 6 percent by the end of the first quarter from 5.5 percent currently.

Meanwhile, United Kingdom-based Pantheon Macroeconomics sticks to its prediction that the BSP will start to pause with rate hikes in February.

This is based on its forecast that inflation in January will be lower, confirming that the December readout was the peak. INQ

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