The Bangko Sentral ng Pilipinas may raise the overnight borrowing rate to 6.5 percent or even higher this year if core inflation does not show signs of cooling down, according to Hongkong and Shanghai Banking Corp.
“We argued previously that the crux for monetary policy moving forward will be core CPI [consumer price index]. And we think core CPI can still be punchy in March and April given that its momentum hasn’t shown any signs of letting up,” HSBC said in a comment after the BSP raised the key policy rate by 25 bps [basis points] to 6.25 percent on Thursday.
London-based Oxford Economics also said that while inflation edged down to 8.6 percent in February from 8.7 percent in January, it remained above the 4-percent upper ceiling of the target, which led the BSP to raise rates.
“We expect the BSP to raise the policy rate again by 25 bps at its May meeting, before holding the rate at that level throughout the year. We look for inflation to trend down barring another supply shock, which will make the BSP comfortable staying put. However, risk of further/bigger hikes cannot be ruled out if the peso depreciates a lot given ongoing external pressures,” Oxford Economics said.
The think tank said while inflation was expected to come down as food and energy prices eased due to resolving supply-side pressures, the pace of decline would be gradual. “We think average inflation for the year will settle at 5.8 percent, unchanged from last year. But what is important is that the sequential momentum will moderate, which will ease pressures on the BSP to continue hiking,” it said.
HSBC agreed that the BSP would keep hiking interest rate as core inflation continued to be elevated. “Thus, we expect the BSP to increase its policy rate by 25 bps in May to 6.50 percent which we think will be the last rate hike before pausing,” the bank said.
“However, if core CPI rises further than expected, there is a risk that the BSP will push interest rates higher than 6.50 percent,” it said.
Economists said core inflation better represents the underlying trend of inflation. In the Philippines, it accelerated to 7.8 percent year-on-year in February from 7.4 percent in January, which was the highest level since 1999.
Core inflation is the change in prices of goods and services, excluding those from the food and energy sectors.
Medalla said in an interview with CNBC Asia monetary authorities started to breathe a sigh of relief, knowing that they were not alone in fighting the elevated inflation that blew past the target range of 2 to 4 percent last year.
Medalla said inflation in the country was largely due to—aside from oil— “very protectionist agricultural policies.”
“And I think that is already being addressed… This is not the time to be overprotective of agriculture, that message is very clear and that is why we are relieved that we are not alone now in fighting inflation,” Medalla said in the online interview.
“We are now quite confident after the government formed an anti-inflation task force. The very focus of that group is to prevent surprise shortages in food and agricultural products from adding to inflation. In fact they want to reduce the contribution to inflation,” he said.