Philippines: Firm commitment on fighting inflation
The Bangko Sentral Ng Pilipinas (BSP) continued with its big interest rate increases in September’s meeting, raising its benchmark overnight reverse repurchase rate by another 50bps to 4.25%. This marked the fifth increase since the hiking cycle began in May, cumulating to 225bps. The policy rate is now above the pre-pandemic 4Q19 level of 4.0%. The aggressive hike underpinned the BSP’s firm commitment to bring headline inflation back to its 2-4% target range. The central bank’s considerations regarding the Philippines’ peso weakness vs the US dollar (the third weakest major Asian currency this year; down ~13%) related to the extent of upside spill-overs onto imported inflation.
In our view, the BSP’s inflation fight is not yet over. The BSP revised up its inflation projections yesterday after raising its forecasts in August. It lifted its headline rate to 5.6% (from 5.4%) for 2022 and 4.1% (from 4.0%) for 2023, both above-target. Headline inflation stood at 6.3% YoY in August, while the pick-up in core inflation to 4.6% YoY in the same month reflected signs of demand-side pressures. Even though global commodity prices are already correcting lower, second-round effects in the Philippines are clear from the increase in public transport fares that will be effective starting early-October. This is the second increase this year and could create knock-on impact onto prices in other areas.
The last two meetings for 2022 will be in November and December. In terms of forward guidance, BSP Deputy Governor Dakila said that ‘any decision will be data-dependent.’ We think the size of the increase will depend on Philippines’ inflation prints, peso performance and economic growth. We reckon that the BSP may have to keep up with another 50bps increase to 4.75% in November (a rate last seen in early-2019), and possibly follow up with another 25bps to 5% in the final meeting of the year. Inflation looks entrenched and the prospect of a higher terminal rate from the US Fed would potentially weigh further on the peso, imparting inflationary impulses. Deputy Governor Dakila also mentioned in the press briefing that there is a lagged impact of monetary policy transmission on inflation by around five to six quarters, which we think would justify frontloading. The BSP also thinks the domestic economy can accommodate reasonable tightening, where downside risks lie in our policy rate forecasts. The 3Q22 growth print will be released prior to November’s meeting, and should there be a sharp deceleration and much lower-than-expected growth, the authorities could contemplate to reduce the tightening pace to balance growth-inflation risks.
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