BSP Governor Considers Off-Cycle Rate Hike as Inflation Remains Elevated
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. announced that the Monetary Board has not yet decided on the need for an off-cycle rate hike following the government’s announcement of a still high inflation rate of 6.1 percent for September. Remolona, who chairs the Monetary Board, stated, “we haven’t decided,” when asked if a policy rate adjustment would be issued before the scheduled meetings on November 16 and December 14.
Remolona previously indicated to the market that an off-cycle rate hike might be an option in addition to the two remaining policy meetings for the year. However, he clarified that the decision is still pending further data analysis. After observing the 6.1 percent consumer price index (CPI) for September, Remolona now sees a policy rate increase on November 16 as a possibility.
Nalin Chutchotitham, a economist at Citigroup for the Philippines, believes the BSP will raise benchmark rates by 25 basis points (bps) to 6.50 percent next month, with the potential for another 25 bps increase on December 14 if supply side risks persist. Chutchotitham emphasized the need to anchor inflation expectations, as surveys and market forecasts suggest elevated inflation expectations for 2024-2025.
While the surge in September’s inflation was driven by rice prices and easing inflation in core goods and services, Chutchotitham argued that anchoring inflation expectations should take precedence. Citigroup maintains its view that there will be no policy rate cut in the first half of 2024 and expects the policy rate to end 2024 at 5.25 percent.
Given global uncertainties and a slowdown in growth, Chutchotitham believes the BSP will adopt a gradual approach. Citigroup estimates a neutral rate range of one percent to two percent, compared to BSP’s 3.8 percent.
Chutchotitham noted that while Brent crude oil prices are expected to ease in the last quarter of 2023 and 2024, potential supply side risks could lead to another 25 bps hike on December 14. Citigroup’s inflation forecast for 2023 is six percent, higher than BSP’s 5.8 percent, while they project a lower average CPI of 3.4 percent for 2024 compared to BSP’s 3.5 percent. Both forecasts fall within the government’s target inflation rate of two percent to four percent.
September’s CPI of 6.1 percent was at the upper end of BSP’s projection range of 5.3 percent to 6.1 percent and higher than August’s 5.3 percent. This marks a four-month high for inflation.
The BSP will closely monitor the release of the third-quarter gross domestic product (GDP) report on November 8. The market expects the GDP growth to be slightly higher than the previous quarter’s 4.3 percent, with some analysts forecasting a 5.2 percent growth for July to September, still below the government’s projection of six percent to seven percent.
Remolona stated that the cumulative 425 bps rate hikes have not yet impacted GDP growth, but BSP aims to maintain a balance between supply and demand to keep the inflation rate within the target range. The BSP’s major concerns regarding supply shocks are transport fare hikes and increases in electricity rates, which could potentially increase the CPI by about 0.5 percent.
