By Katherine K. Chan, Reporter
A THIRD STRAIGHT rate hike from the Bangko Sentral ng Pilipinas (BSP) is expected later this month as it seeks to steer inflation back to target even as economic growth slumped to a new post-pandemic low in the second quarter.
Security Bank Chief Economist Angelo B. Taningco said the BSP could remain hawkish but with a less aggressive stance after weaker-than-expected inflation and gross domestic product (GDP) growth.
“We think the slower-than-expected second-quarter GDP growth performance together with another month of downside CPI (consumer price index) inflation surprise in July have reinforced our less aggressive monetary tightening outlook,” he told BusinessWorld in an e-mail.
This means ending its tightening cycle with a final 25-basis-point (bp) rate hike at its upcoming policy review on Aug. 27.
“The continued weakness of the economy means the case for further hikes is less clear-cut,” Capital Economics Senior Asia Economist Gareth Leather said in a report.
“But with inflation still well above target, we expect one more 25-bp hike at the BSP’s next meeting on 27th August before it calls a halt to its hiking cycle,” he added.
Mr. Leather noted that further tightening will strain domestic activity, especially as he sees GDP growth missing the government’s target at around 3% this year and 4.5% next year.
In the second quarter, GDP growth slowed to 2.3% from 5.4% a year ago and 2.8% in the previous quarter as the oil shock-driven inflation dampened household spending and lingering governance issues subdued investments.
This marked the fourth consecutive quarter of slowing growth. It was also the economy’s worst performance since the pandemic or when it contracted by 3.8% in the first quarter of 2021.
The latest GDP print brought the country’s first-half growth to 2.6%, below the government’s 3.5%-4.5% full-year target.
Meanwhile, headline inflation slowed for a third straight month at 6.2% in July. This was, however, the fifth month in a row that inflation settled above the central bank’s 3% target. Inflation averaged 5% in the seven-month period.
Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said potentially heavier price pressures from the El Niño event and expectations of a second-half economic rebound may leave the door open for “a larger rate increase later in the year.”
“Recent policy actions suggest that the central bank is attempting to balance the need to bring inflation under control while avoiding a sharp slowdown in economic activity, resulting in a gradual pace of tightening in recent months,” he said in a report.
“However, a larger rate increase later in the year cannot be ruled out, particularly if the impact of El Niño on food prices proves more severe than currently anticipated. Moreover, a potential rebound in economic growth in the second half of the year may allow BSP to place greater emphasis on anchoring inflation expectations,” he added.
On the other hand, Nomura Global Markets Research is projecting up to a fourth straight 25-bp rate hike, noting that inflation concerns outweigh growth woes in the BSP’s policy framework.
“The Q2 GDP disappointment will unlikely derail BSP’s hiking cycle, in our view, because it remains focused on bringing inflation back to target over the policy horizon (2027-2028) and anchoring inflation expectations, rather than supporting domestic demand,” Nomura economists Euben Paracuelles and Nabila Amani said in an e-mailed note.
Mr. Paracuelles and Ms. Amani said the central bank may remain measured as it balances fresh inflation risks, improved fiscal spending, and a still-negative output gap.
University of Asia and the Pacific Economist Marco Antonio C. Agonia likewise sees the BSP delivering two additional 25-bp rate increases before standing pat this year.
“The expected second-half recovery narrative may keep the BSP in a moderately conservative stance,” he told BusinessWorld in an e-mail. “BSP may continue tightening to manage inflation expectations, but we think they won’t tighten by too much as implementation risks still exist for these (infrastructure) projects.”
BSP Governor Eli M. Remolona, Jr. has said that there is a “small chance” that emerging inflationary risks from the Middle East war-driven volatility, wage hike, and the government’s new tax reforms could prompt them to deliver a 50-bp rate hike.
He also earlier said that the economy can likely absorb a third-quarter-point hike, with the government’s catch-up measures projected to boost growth in the second half.
A PAUSE?
For Philippine National Bank Chief Economist Alvin Joseph A. Arogo, however, the current macro backdrop calls for the BSP to hit pause on tightening before economic growth suffers further.
“It is very clear that the rate hikes have been quickly felt by the real economy,” he told BusinessWorld in an e-mail. “Although headline and core inflation are still above the BSP’s target, the July print suggests the trend is downward.”
“Therefore, the BSP should keep the policy rate unchanged on Aug. 27 as another hike will do more harm than good since it would put at risk the potential for growth recovery in the second half but not solve the supply-shock driven inflation,” Mr. Arogo added.
Miguel Chanco, chief Emerging Asia economist at Pantheon Macroeconomics, also expects the central bank to stand pat, saying that inflation likely peaked, but growth might not have bottomed out.
“Our core view is that further tightening now from the Board later this month would be overkill,” he also told BusinessWorld in an e-mail. “It’s quite clear that the postwar surge in inflation has peaked, even if we might see some stickiness in the headline rate in (the) short run due to the temporary rise in oil prices last month.”
“What is a bigger doubt is whether the slowdown in growth has bottomed out, which is where I think the Board’s attention should now turn to,” he added.
Mr. Chanco noted that the economy might not recover as much in the second half as the government expects, citing the damage the Middle East war has inflicted on business and consumer confidence, alongside persistently weak infrastructure spending.
Since it began tightening in April, the central bank has so far lifted benchmark borrowing costs by 50 bps, which brought the policy rate to a near one-year high of 4.75%.
“I don’t think we’ve seen enough hikes this year to materially impact growth in the near term, due to the natural lags between monetary policy and the real economy,” Mr. Chanco added. “At least, however, it will hold back the prospects of a decent recovery.”
The Monetary Board will hold its fourth rate-setting meeting this year on Aug. 27, with two more to follow on Oct. 22 and Dec. 17.
