By Keisha B. Ta-asan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) is expected to slow the pace of its rate increases to a quarter of a point on Thursday amid concerns over elevated inflation and fallout from recent bank failures in the United States.
A BusinessWorld poll last week showed 12 out of 14 analysts expect the Monetary Board to hike rates by 25 basis points (bps) on March 23.
On the other hand, one analyst sees the Monetary Board increasing the policy rate by 50 bps, while another economist expects the BSP to pause.
While it will remain focused on its inflation fight, analysts said the Monetary Board will unlikely be as aggressive as before in line with recent turmoil in financial markets.
“We expect the central bank to dial down the pace of hikes from 50 bps in February as monetary authorities would likely take into consideration: a) lagged effect of previous hikes; b) unexpected inching down of inflation in February; and c) risk of a global financial crisis due to the recent bank failures in the US,” Philippine National Bank economist Alvin Joseph A. Arogo said.
Despite the slight deceleration in February inflation, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the Monetary Board will likely hike at a slower pace “to abate the risk of a further buildup of inflationary expectations.”
In February, the Monetary Board raised its benchmark interest rate by 50 bps for a second straight meeting, bringing its cumulative rate hike to 400 bps since May 2022. This brought the key rate to a near 16-year high of 6%.
Inflation eased for the first time in six months in February, slowing to 8.6% from 8.7% in January. However, core inflation quickened to a 22-year high of 7.8% in February from 7.4% in January.
The February inflation data gave mixed signals, ANZ Research economist Debalika Sarkar said, adding that the headline print was only a tad lower than January, but food and core inflation further accelerated.
“However, these annual rates have masked the weak month-on-month momentum which the central bank will likely take into consideration at its upcoming policy rate decision,” she said.
Stripping out seasonality factors, consumer prices dipped by 0.3% in February from 1% a month earlier.
“February data could also be a signal that headline inflation may have peaked in January. As the possibility of a La Niña-related weather disruption has receded, food prices could improve from here on,” Ms. Sarkar added.
Domini S. Velasquez, chief economist at China Banking Corp., noted some downward pressures on inflation this month, citing easing vegetable prices, a likely cut in transport fares, and lower airline charges.
“However, a key downside risk is if the contagion effect of the bank fallout in the US (spreads,) which can lead to wealth losses and hence become disinflationary. Currently, our view is that this is limited to specific concerned banks and that the banking system in the Philippines remains robust,” she said.
The BSP on Friday said the banking system remains safe and sound amid fears over possible contagion from the turmoil engulfing some banks overseas.
The collapse of the Silicon Valley Bank and Signature Bank marked the biggest bank failures in the US since the global financial crisis in 2008, and renewed fears of a global banking crisis. Credit Suisse was also caught up in the fallout from the US bank failures, prompting authorities to work to restore confidence in the Swiss bank.
“This smaller increase, however, compared to the previous 50-bp move suggests a more cautious approach to strike a balance between managing inflation — which is estimated to begin tempering this month — and supporting economic growth; attempting to maintain macroeconomic stability while addressing potential risks to the economy given what happened to several small banks in the US and to Credit Suisse,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.
FED IN FOCUS?The Monetary Board may also consider the decision of the Federal Open Market Committee this week, Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail.
“We are inclined to think that recent hawkish comments by Fed Chair (Jerome H.) Powell may hold more weight than the immediate US banking challenges. Plus, latest US CPI (consumer price index) data points to a still persistent overall inflation that would need more pushback from the US Fed,” he said.
The US Federal Reserve raised the fed funds rate by 25 bps to 4.5-4.75%. It has hiked rates by a total of 450 bps since March 2022. The Fed’s next policy review will be on March 21 and 22.
Inflation in the US eased to 6% in February from 6.4% in January. This is the smallest yearly gain in US inflation since September 2021.
For Makoto Tsuchiya, an economist from Oxford Economics, recent volatility in the foreign exchange market due to the Fed’s signals of further tightening does not warrant “urgent attention” from the BSP.
“While the currency retraced some of the gains made earlier in the year, this is against the stronger dollar rather than due to weakening local currency,” he said.
At its close of P54.71 per dollar on Friday, the peso has strengthened by 1.9% from its P55.755 finish as of end-2022. As of end-2022, the peso weakened by 8.5% year on year.
“That said, further supply-side issues and more aggressive US Fed tightening could leave the BSP no choice but to tighten than desired,” Mr. Tsuchiya added.
After its March 23 meeting, analysts are divided on whether the BSP will pause or hike by another 25 bps at the next meeting on May 18.
“Our baseline forecast is for another 25-bp hike in May to bring the policy rate to 6.5%. However, a lower-than-expected inflation rate in March and April, or an escalation in the financial turmoil overseas may convince the BSP to pause starting May,” Mr. Arogo said.
However, it is still too early to conclude that inflation risks in the country have eased, Ms. Sarkar said.
“Even if there is a downward turn, inflation is unlikely to fall back into the official target range of 2-4% before the fourth quarter of 2023. Our base case reflects another 25-bp hike in May, taking the terminal rate to 6.5%,” she said.
Ms. Velasquez said that by May, the cumulative rate hikes would have already impacted the Philippine economy.
“For the rest of the year, we think the BSP will likely keep monetary policy tight until it is sure inflation is firmly within the central bank’s target. Our expectation is that headline will only fall to 4% by November this year,” she said.
Sun Life Investment Management and Trust Corp. economist Patrick M. Ella also said the BSP can afford to pause for the next meetings.
“Then perhaps by late third quarter or early fourth quarter, the BSP can consider starting rate cuts as the inflation rate is seen to come down closer to the 2-4% target range by late second half of 2023,” Mr. Ella said.
BSP Governor Felipe M. Medalla earlier said headline inflation may return to the 2-4% target by November or December this year.
The BSP sees full-year inflation at 6.1% this year, before slowing down to 3.1% in 2024.