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Analysts expect fresh 50bp rate hike

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BSP

By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely raise interest rates by another 50 basis points (bp) this week, according to most analysts in a BusinessWorld poll, citing inflation fueled by damage from the storm that ravaged Northern Luzon the other week and unrelenting oil price hikes.

All but one of the 16 economists polled last week said the central bank will introduce another aggressive rate hike on Thursday — an “inevitable” move amid risks that inflation could breach another multi-year high in September due to widespread damage caused by typhoon Mangkhut, locally called Ompong.

The policy-setting Monetary Board will hold its sixth review this week.

If the forecast is realized, it would mark a fourth consecutive tightening move since May that would bring benchmark yields to the 4-5% range.

“Since another meaningful rate hike is necessary to convince consumers and businesses that price increases will not persist in the future, we expect the BSP to hike the policy rate by at least 50 basis points on their September 27 policy meeting,” said Emilio S. Neri, Jr., lead economist at the Bank of the Philippine Islands.

Economists said inflation will likely mark a new multi-year peak this month as food prices can be expected to soar in the wake of the strong typhoon that caused at least P14 billion worth of agricultural damage, according to initial estimates made by the National Disaster Risk Reduction and Management Council. The storm hit hard key crop producers Benguet, Isabela and Cagayan.

Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, said September inflation could trend “towards seven percent” amid persistent food supply bottlenecks and as world oil prices keep rising.

Prior to the typhoon, several analysts had pencilled a modest 25bp rate hike from the BSP.

“The potential impact of Typhoon Mangkhut on food prices has significant implications for headline CPI (consumer price index),” said Noelan Arbis, economist at the Hong Kong and Shanghai Banking Corp.

“The continued upside risks to inflation beyond 3Q mean that there is greater likelihood of further monetary tightening in the next six months.”

Apart from tempering inflation expectations — which play a key role in fueling actual consumer price hikes — the 50bp rate adjustment is likewise expected to provide a reprieve for the peso, which has been down by nearly eight percent year-to-date.

“Higher policy rate hikes help in supporting the peso and, broadly, also help in tempering inflationary pressures as well as in lowering inflation expectations,” said Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. “[H]igher interest rates lead to increased borrowing/financing costs that could slow down loan demand and broader economic activities and, in the process, may result in some easing of inflationary pressures on the demand side.”

Central bank officials have been vocal about “excessive volatility” in the currency market as the peso broke the P54-per-dollar level earlier this month. This has prompted the BSP to reopen a hedging facility for corporate borrowers in a bid to ease pressures on the peso.

BSP Governor Nestor A. Espenilla, Jr. last week committed to “take strong immediate action” in response to the faster-than-expected 6.4% inflation rate recorded in August, which would follow a cumulative 100bp increase in rates so far this year.

Mr. Espenilla had hinted a “strong policy response” ahead of the BSP’s Aug. 9 meeting, which eventually translated into a 50bp rate hike, marking the central bank’s biggest adjustment in a decade. However, the BSP chief will not be presiding over the upcoming Monetary Board meeting as he has been on a two-week medical leave since Wednesday. Deputy Governor Chuchi G. Fonacier has been designated as officer-in-charge until Oct. 2.