UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting assess the latest interest rate decision by the BSP.
“Bangko Sentral ng Pilipinas (BSP) decided to escalate its inflation fight with a second back-to-back 50bps rate hike today (22 Sep), taking the overnight reverse repurchase (RRP) rate to 4.25%. The decision matched market expectations but came in more aggressive than we had anticipated. We attribute it to the impact of a more aggressive shift in US Fed’s hawkishness this morning (22 Sep), steeper depreciation in Peso (PHP) to an all-time low, and expected broadening of second-round effects on inflation from an approved fare hike for public transports that will take effect on 3 Oct.”
“The overall tone of the latest monetary policy statement (MPS) was largely unchanged compared to Aug’s statement, in which the central bank continues to highlight inflation as its primary concern, leaving the door open for more rate hikes and remains data dependent. BSP raised its full-year inflation projections again to 5.6% for this year (from Aug’s estimate of 5.4%, UOB est: 5.5%) and 4.1% for 2023 (from Aug’s estimate of 4.0%, UOB est: 4.5%), but trimmed its 2024 inflation forecast to 3.0% (from Aug’s estimate of 3.2%).”
“Given that the circumstances (i.e. Fed rate expectations, FX movement, and domestic policy changes) have changed dramatically from our assessment last month, we now think that BSP will need to respond more forcefully to these new developments. The cumulative 225bps interest rate increases so far this year, which fully unwound the 200bps cuts in 2020 with a tighter rate than prepandemic by 25bps, indicates that BSP is willing to tolerate a pullback in domestic growth as the necessary trade-off for bringing inflation back to target range. Thus, we raise our RRP rate projection to 5.00% by end-2022 (from 4.00% previously) with a 50bps hike in Nov and a 25bps hike in Dec. Thereafter, we stick to our view that BSP will press the rate pause button at 5.00% through 2023 until the global and domestic landscape warrants a change.”