BSP likely to stick to small rate hikes as inflation pressures begin to ease

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely take a hawkish but measured stance at this week’s policy meeting as the slower-than-expected May inflation print lowered the odds of an outsized hike, Nomura Global Markets Research said.

“We expect BSP to hike by another 25 bps (basis points) to 4.75% on June 18, as headline inflation remains above target and core inflation continues to rise, which BSP will likely read as a sign of continued second-round effects from the energy price shock,” Nomura economist for Asia ex-Japan Si Ying Toh said in a report.

Ms. Toh’s projection is in line with the result of a BusinessWorld poll, which showed that 15 of 20 analysts see as second straight 25-bp increase from the Monetary Board on Thursday that would bring the policy rate to 4.75%.

The Nomura economist said the central bank is unlikely to make an aggressive move amid signs of easing price pressures after the latest headline inflation print came in well below forecasts.   

“We expect BSP to remain measured in its approach to the hiking cycle, as headline inflation surprised lower in May and upside risks appear to be dissipating, precluding the need for a more aggressive 50-bp hike,” she said.

In May, lower transport and food prices helped cool consumer inflation to 6.8% from the over three-year high reading of 7.2% in April. This was better than the 7.9% median estimate in a BusinessWorld poll of 16 economists and the BSP’s own 7.1%-7.9% projection for the month.

Still, Nomura sees the BSP delivering 50 bps more in increases after this week’s projected 25-bp hike to bring the benchmark rate to an over one-year high of 5.25% by yearend.

Meanwhile, Security Bank Corp. Chief Economist Angelo B. Taningco said easing global oil prices following news of a peace deal between the United States and Iran will help lower inflation expectations.

This comes as he said that Security Bank Research’s latest misery index rose to an over three-year high of about 12% in April amid red-hot inflation and rising unemployment in the country.

“We feel that the misery index has now greater room to go down for the remainder of the year, because this tumble in global oil prices, thanks to the interim deal between US and Iran, will likely reduce inflation expectations,” Mr. Taningco told Money Talks with Cathy Yang on One News on Monday.

“In fact, this is also good for the upcoming Monetary Board meeting, as our house view is still intact at only (a) 25-basis-point hike,” he added.

Mr. Taningco said a gradual tightening pace by the BSP could temper inflation without hurting the country’s fragile labor market.

Latest government data showed the local unemployment rate rose to 4.7% in April from 4.1% a year ago. This was equivalent to 2.41 million jobless Filipinos, over 350,000 higher than the 2.06 million last year.

“So, a moderate pace of rate hikes, because you still have heightened inflation, to restore price stability, while also recognizing a fragile labor market and subdued growth… will be more attuned to restoring more balance between one, having economic stability in terms of lower economic misery as we fight inflation, while also taking into account jobs recovery,” Mr. Taningco said.

On Sunday, US and Iranian officials confirmed that they have agreed to end their over three-month long war, with the deal set to be signed on Friday in Switzerland.

The agreement will lift the US’ naval blockade on Iran and effectively reopen the Strait of Hormuz, which would help ease global oil prices.