By Katherine K. Chan, A reporter
INFLATION IS STILL UP and the continued weakness of the peso may prompt the Bangko Sentral ng Pilipinas (BSP) to hold a second straight meeting to stay ahead of the curve and keep inflation expectations in check, analysts said.
A BusinessWorld a survey conducted last week showed 15 out of 20 analysts expect the Monetary Board to raise interest rates again by 25 basis points (bps) to 4.75% at its June 18 meeting.
Meanwhile, four analysts expect a 50-bp rate hike, saying the extension of price pressures calls for aggressive action. If possible, this will bring the stop rate to 5%.
Only one analyst, Ser Percival K. Peña-Reyes, a senior researcher at the Ateneo Center for Economic Research and Development, sees the BSP standing still this week, citing the country’s uncertainty.
Many analysts say the central bank is in a better position to deliver a “moderate” 25-bp hike this week after last month’s headline inflation and sluggish domestic growth.
If possible, this would bring the key rate to 4.75% from the current 4.5%, the highest in a year or from 5% in August last year. It will also match the benchmark set in October 2025.
“Although the latest inflation reading was softer than expected, this has undermined the risk of inflation, but not yet hawkish policy,” said Asia University economist and economist Marco Antonio C. Agonia. BusinessWorld by email.
“The BSP may also be considering a softer rate hike this year, limiting any rate hike moves in the upcoming meeting,” he added.
Maybank Investment Bank economist Azril Rosli noted that the BSP is likely to maintain a dovish stance as core inflation for May shows persistent price pressures, although inflation will keep it from acting aggressively.
“As the BSP chooses to assess incoming data and the lagged effects of monetary policy, we believe the Monetary Board may raise rates gradually, taking into account the latest inflation readings, which showed less moderation than warranted an aggressive policy response,” he said in an email.
Lower transport costs amid rising global oil prices led to inflation missing market expectations in May, falling to 6.8% from 7.2% in April. This was slower than the average forecast of 7.9% over the period BusinessWorld a poll of 16 economists.
However, core inflation, which lowers food and energy prices, breached the BSP’s 2%-4% target for the first time in two years as it rose to 4.1% in May from 3.9% last month.
Earlier this month, the central bank told Reuters that it could consider taking stronger measures to bring inflation back to its 3% target if high inflation is fixed.
This happened after BSP Governor Eli M. Remolona, Jr. had suggested an off-cycle before their scheduled June review before hearing that the latest inflation rates were below their 7.1%-7.9% range.
The Monetary Board last tightened its monetary policy in April, delivering its first 25-bp hike in two and a half years as the first step to ease inflationary pressures and ensure that inflation expectations remain firm.
Central bank officials then raised key policy rates as they saw rising energy costs from the global oil shock begin to spill over into other big items such as food and fertilizer.
After the outbreak of conflict in the Middle East in late February, local gasoline prices rose to over P100 a liter from P50 to P60 a liter before the war.
As of the end of May, a liter of gasoline was sold at P72.40 to P109.50, while diesel cost P76.40 to P98.50 a liter, kerosene went from P110.90 to P140 a liter.
Although local gasoline retailers have imposed several recall since mid-April, pump prices rose last week.
For Kausani Basak, economist at ANZ Research, this means that inflation will continue to exceed the BSP’s target, which could justify another round of tightening on Thursday.
“We expect inflation to remain above the BSP’s 2-4% target for the year as pressure on oil prices continues and the (conflict) in the Middle East remains unresolved,” he said in the report. “The effects of the second round on prices will be seen to increase significantly in the coming months as producers pass on higher production costs to eliminate consumers.”
A BIG JOURNEY?
Meanwhile, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. he said the BSP may need a bigger 50-bp rate hike to bolster inflation expectations as price pressures continue to build.
“Second-round effects, such as service inflation, are not yet fully apparent and could lead to wider price increases once they are passed on to consumers,” he said of Viber.
“Apart from oil price movements, the possible impact of El Niño is an important factor, as it may disrupt agricultural production and drive food prices higher. External factors remain important as well, with the BSP needing to prevent excessive monetary fluctuations within the wide gap between inflation and the policy rate,” Mr. Neri added.
Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., similarly sees the BSP opting for a 50-bp hike, especially considering inflation remains above the BSP’s tolerance range.
This also comes as he projects consumer prices to continue rising, with year-over-year inflation reaching 6%-7%, during the El Niño season.
The BSP last delivered a 50-bp hike in February 2023 during a tightening cycle caused by the oil shock after Russia’s invasion of Ukraine in early 2022. At that time, inflation stood at 8.6%.
If the BSP raises the policy rate by 50 bps this week, the main borrowing cost will reach its highest level in a year or from 5.25% in June 2025.
POLICY WAY FORWARD
Analysts noted that while the current inflationary environment may allow for general policy tightening, the country’s strong economic growthBSP’s policy approach is simple.
“Weak domestic demand is constraining the BSP’s policy environment,” Chinabank Research said in a note. “Therefore, we think the BSP has limited room to tighten monetary policy. This policy cycle will focus on ensuring that inflation expectations remain stable in addition to reducing domestic demand.”
In the first quarter, gross domestic product growth in the Philippines slowed to a fresh 2.8% after the pandemic as the oil shock added to the lingering effects of last year’s flood control chaos. This was weaker than the 3% increase in the fourth quarter and 5.4% seen last year.
Chief Economist at Metropolitan Bank and Trust Co. Nicholas Antonio T. Mapa said the BSP will “tread lightly” on future policy decisions to avoid hurting the country’s faltering economy.
“The BSP will err on the side of caution in the coming months, ensuring it avoids throwing growth momentum out with the bathwater,” he said in a Viber message.
“The BSP aims to keep inflation at the target level for now as it provides a favorable environment for sustainable growth. sustainable growth,” he added.
For Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion, the central bank can end its tightening cycle if both headline and core inflation continue to moderate.
However, the BSP will have room for a rate hike if inflation accelerates again, inflation expectations rise, or external pressures from oil prices and foreign currency volatility worsen, he added.
“We see an opportunity for further tightening beyond the June meeting, possibly in the form of a 25-bp adjustment, depending on inflation. it changes,” he said in an e-mail.
Meanwhile, Mr. BPI’s Neri said inflationary pressures from a weaker peso may also allow for further tightening by the BSP.
“The peso remains under pressure, it breached P60/USD in March and recently traded near P61.30/USD. A further decline could increase inflation in other countries, making the exchange rate a very important policy consideration,” it said.
The peso fell to the P61-per-dollar range from the P58 level before the Middle East war broke out.
In May, it averaged P61.441 against the dollar, about 1.91% or P1.1497 weaker than the P60.2913 posted in April, according to central bank data.
However, it gained 4.5 cents to close at P61.35 against the greenback on Thursday from its close of P61.395 on Wednesday, marking its strongest close in over a month.
The central bank said foreign exchange market intervention was limited to limiting sharp movements that could slow inflation, but did not maintain a specific exchange rate.
The BSP expects inflation to remain above 5% for the year to 6.3% in 2026, before cooling to 4.3% in 2027.
After June 18, the Monetary Board will hold three more rate-setting meetings this year in Aug. 27, Oct. 22 and Dec. 17.
