Most economic think tanks forecast additional, but smaller, increases in the Bangko Sentral ng Pilipinas (BSP) policy rate in the coming months. But many expect the tightening cycle to come to a halt after December, mainly as inflation is expected to peak in the fourth quarter.
Gareth Leather, senior Asia economist at UK-based Capital Economics, noted that the BSP gave a strong indication that further rate hikes are likely over the coming months.
Given that and “with inflation set to peak soon and headwinds to economic recovery, we don’t expect the tightening cycle to continue much beyond the second half of this year,” Leather said.
New York-based GoldmanSachs says the central bank is now primarily focused on controlling inflation rather than supporting economic recovery.
“Going forward, as the economy recovers, with elevated price pressures, rising inflation expectations and an increased focus on inflation by the monetary board, we continue to expect increases. consecutive 25 basis points. [or 0.25-percentage point] hikes in September, November and December,” GoldmanSachs said.
Such a series of increases – totaling 0.75 percentage points – would take the BSP’s overnight borrowing rate to 4.5% by the end of this year.
Oxford Economics, which is also based in the UK, believes there will be only one more rate hike in the rest of this year and only 0.25 ppt in either November or December.
“Inflation has yet to peak at around 7.7% in the fourth quarter, and we see the peso remaining weak in 2022 and entering 2023, keeping import prices high,” Makoto said. Tsuchiya, Deputy Economist at Oxford Economics.
“As such, BSP still has work to do. But thereafter, we expect that [cental bank] take an extended break,” Tsuchiya said.
“Blind to Reality”
On the other hand, Pantheon Macroeconomics – also based in the UK – said the BSP was “blind to reality and to its own forecasts”.
Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said the BSP’s fourth rate hike in as many months is “overdone,” especially after an off-cycle 0.75 point rise in July.
“Monetary policy is a forward-looking exercise, so it was more than odd that the [BSP] continued to tighten, while recognizing at the same time that the medium-term inflation outlook is now improving,” Chanco said.
On Thursday, BSP Governor Felipe Medalla said that while inflation expectations for 2022 had risen, projections for 2023 and 2024 had fallen.
“Overall, we would be very surprised if the BSP tightens its policy further from current levels, and we cannot now rule out the chances of a partial pullback from the 175 basis points. [1.75-ppt] up next year, especially if we’re right about the economy’s likely continued underperformance,” Chanco said. INQ
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