By Katherine K. Chan, Reporter
STILL ELEVATED INFLATION and the peso’s persistent weakness may prompt the Bangko Sentral ng Pilipinas (BSP) to tighten for a second straight meeting to remain ahead of the curve and keep inflation expectations anchored, analysts said.
A BusinessWorld poll conducted last week showed 15 of 20 analysts expect the Monetary Board to lift the rate of interest anew by 25 basis points (bps) to 4.75% at its June 18 meeting.
Meanwhile, 4 analysts anticipate a 50-bp rate hike, saying that broadening price pressures call for a more aggressive motion. If realized, this is able to bring the benchmark rate to five%.
Just one analyst, Ser Percival K. Peña-Reyes, a senior research fellow on the Ateneo Center for Economic Research and Development, sees the BSP standing pat this week, citing geopolitical uncertainties.
Most analysts said the central bank is healthier positioned to deliver a “measured” 25-bp hike this week after headline inflation eased last month and with still sluggish domestic growth.
If realized, this is able to bring the important thing rate to 4.75% from the present 4.5%, the best in nearly a yr or because the 5% in August last yr. It might likewise match the benchmark rate set in October 2025.
“While the newest inflation reading was softer than expected, this only subverted the risks of an off-cycle hike, however it has not paused the fundamentally hawkish policy stance,” University of Asia and the Pacific economist Marco Antonio C. Agonia told BusinessWorld in an e-mail.
“BSP may be considering the softer growth horizon for this yr, limiting any outsized rate hike movements for this coming meeting,” he added.
Maybank Investment Bank economist Azril Rosli noted that the BSP is probably going to take care of a hawkish stance as May’s faster core inflation signals persistent price pressures, though the easing headline inflation will keep it from acting aggressively.
“Given the BSP’s preference to evaluate incoming data and the lagged effects of monetary policy, we imagine the Monetary Board is more likely to raise rates at a gradual pace, making an allowance for the newest inflation readings, which showed a slight moderation slightly than warranting a more aggressive policy response,” he said in an e-mail.
Lower transport costs amid easing global oil prices led headline inflation to undershoot market expectations in May, settling at 6.8% from 7.2% in April. This was slower than the 7.9% median forecast in a BusinessWorld poll of 16 economists.
Nonetheless, core inflation, which discounts volatile food and energy prices, breached the BSP’s 2%-4% goal for the primary time in over two years because it quickened to 4.1% in May from 3.9% a month ago.
Earlier this month, the central bank told Reuters that it might consider taking stronger measures to steer inflation back to its 3% goal if elevated inflation expectations turn out to be entrenched.
This got here after BSP Governor Eli M. Remolona, Jr. earlier hinted at an off-cycle hike before their scheduled June review prior to learning that the newest inflation print settled below their 7.1%-7.9% estimate.
The Monetary Board last tightened its monetary policy in April, delivering its first 25-bp hike in two-and-a-half years in a preemptive move to temper inflationary pressures and ensure inflation expectations remain anchored.
Central bank officials said then that it raised the important thing policy rate because it saw rising energy costs from the worldwide oil supply shock begin to spill over to other major commodities comparable to food and fertilizer.
After the Middle East conflict broke out in late February, local fuel prices soared to over P100 per liter from P50 to P60 per liter before the war.
As of end-May, a liter of gasoline was sold for P72.40 to P109.50, while diesel cost P76.40 to P98.50 per liter, and kerosene at P110.90 to P140 per liter.
Although local fuel retailers have imposed several rollbacks since mid-April, pump prices rose last week.
For Kausani Basak, an economist at ANZ Research, this implies inflation will proceed to overshoot the BSP’s goal, which might justify one other round of tightening on Thursday.
“We expect inflation to stay above the BSP’s 2-4% goal range for the remaining of the yr as oil price pressures persist and (the) Middle East conflict stays unresolved,” she said in a report. “Second-round effects on prices will likely turn out to be increasingly pronounced in the approaching months as producers pass on the upper cost of production to finish consumers.”
LARGER HIKE?
Meanwhile, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the BSP might have a bigger 50-bp rate hike to anchor inflation expectations as price pressures proceed to take shape.
“Second-round effects, comparable to services inflation picking up, have yet to totally materialize and may lead to broader price increases once passed on to consumers,” he said via Viber.
“Beyond oil price movements, the potential impact of El Niño is a key factor, because it could disrupt agricultural production and push food prices higher. External aspects remain essential as well, with the BSP needing to forestall excessive currency volatility amid the wide gap between inflation and the policy rate,” Mr. Neri added.
Michael L. Ricafort, chief economist at Rizal Industrial Banking Corp., likewise sees the BSP choosing a 50-bp increase, especially considering inflation sits well above the BSP’s tolerance range.
This also comes as he projects consumer prices to stay elevated, with full-year inflation averaging 6%-7%, amid the El Niño season.
The BSP last delivered a 50-bp hike in February 2023 during a tightening cycle triggered by an oil shock after Russia’s invasion of Ukraine in early 2022. On the time, inflation stood at 8.6%.
If the BSP lifts the policy rate by 50 bps this week, key borrowing costs would reach its highest level in a yr or because the 5.25% in June 2025.
POLICY PATH AHEAD
Analysts noted that while the present inflation trend may justify usual policy tightening, the country’s tepid economic growth complicates the BSP’s policy path.
“Weak domestic demand constrains the BSP’s policy space,” Chinabank Research said in a note. “Hence, we predict that the BSP has limited room to tighten monetary policy. This policy cycle will probably be focused on ensuring that inflation expectations will remain anchored greater than crimping domestic demand further.”
In the primary quarter, Philippine gross domestic product growth eased to a brand new post-pandemic low of two.8% as oil shocks added to the lingering effects of last yr’s flood control mess. This was weaker than the three% expansion within the fourth quarter and 5.4% seen a yr earlier.
Metropolitan Bank and Trust Co. Chief Economist Nicholas Antonio T. Mapa said the BSP will “tread flippantly” in upcoming policy decisions to avoid further harming the country’s fragile economy.
“BSP will err on the side of caution in the approaching months, ensuring that it avoids throwing growth momentum out with the bathtub water,” he said in a Viber message.
“BSP goals to maintain inflation inside goal in up to now because it provides a conducive environment for sustainable growth. Thus, BSP is not going to lose sight of its overarching goal to offer price stability but only in up to now because it helps deliver sustainable growth,” he added.
For Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion, the central bank could end its tightening cycle if each headline and core inflation proceed to ease.
Nonetheless, the BSP may have space for further rate hikes if inflation accelerates anew, inflation expectations rise, or external pressures from oil prices and foreign exchange volatility worsen, he added.
“We see scope for extra tightening beyond the June meeting, likely in the shape of incremental 25-bp adjustments, depending on how inflation evolves,” he said in an e-mail.
Meanwhile, BPI’s Mr. Neri said inflationary pressures from a weak peso could likewise warrant more rounds of tightening by the BSP.
“The peso stays under pressure, having breached P60/USD in March and recently trading near P61.30/USD. Further depreciation could amplify imported inflation, making the exchange rate an increasingly essential policy consideration,” it said.
The peso fell to the P61-per-dollar range from the P58 level before the Middle East war erupted.
In May, it averaged P61.441 against the dollar, about 1.91% or P1.1497 weaker than the P60.2913 logged in April, in response to central bank data.
Nonetheless, it gained 4.5 centavos to shut at P61.35 versus the greenback on Thursday from its P61.395 finish on Wednesday, marking its strongest finish in nearly a month.
The central bank has said that its foreign exchange market intervention is restricted to tempering sharp movements that might stoke inflation, however it doesn’t maintain a selected exchange rate level.
The BSP expects headline inflation to stay above 5% all year long to average 6.3% in 2026, before cooling to 4.3% in 2027.
After June 18, the Monetary Board is about to carry three more rate-setting meetings this yr on Aug. 27, Oct. 22 and Dec. 17.