The Bangko Sentral Ng Pilipinas (BSP) raised its overnight reverse repurchase rate by 75bps to 5.00% during its November 17 meeting. The aggressive move was already well telegraphed in early-November to anchor inflation expectations and temper downward pressures on the Philippine peso vs the US dollar. Even after 300bps worth of hikes since May 2022, we see a still-hawkish BSP and further tightening, reflected in its rhetoric to bring elevated inflation down to its 2-4% inflation target from October’s 7.7% YoY.
The BSP also revised up its headline inflation forecasts to 5.8% in 2022 and 4.3% in 2023 (vs 5.6% and 4.1% previously; and DBS forecasts of 5.8% and 4.4%). Policymakers are concerned about persistent inflationary pressures and second-round effects seen in accelerating core inflation (5.9% YoY in Oct vs 5.0% in Sep), which reflects higher pass-through from food and energy prices and demand-pull pressures. At the same time, the central bank sees risks to 2023’s inflation outlook skewed strongly to the upside. Upside risks include higher food prices due to supply disruptions and adverse weather conditions, as well as pending petitions on transport fare hikes. Lower global growth was the only downside risk to inflation that was mentioned. The BSP assessed the Philippines’ domestic economy as able to withstand the aggressive tightening and still achieve ‘respectable economic growth’.
In our view, additional BSP monetary tightening is in the pipeline given the context of high and above-target inflation, albeit at a less aggressive pace in the subsequent meetings. This is already incorporated in our base case terminal policy rate forecasts of 6.00% by 1Q23. BSP Governor Medalla signalled the possibility of less aggressive moves, partly contingent on the US Fed’s hikes and spill-overs onto the Philippine peso, in the press briefing after the decision. The peso has stabilised and appreciated vs the USD since early November, which imparts lower imported inflation pressures. The Fed also looks set to shift to smaller pace of hikes, which possibly puts less weakening pressures on the PHP against the USD, and reduces the need for outsized BSP hikes to maintain reasonable positive interest rate differential.
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