Key rates likely to stay unchanged

KEY interest rates will likely be kept unchanged this Thursday, analysts said, following markedly slower inflation and economic growth still falling below target.

With the Monetary Board already having ordered an off-cycle rate hike last month, 11 out of 12 analysts polled by The Manila Times said there was room to resume pausing.

The Bangko Sentral ng Pilipinas’ (BSP) policy rate currently stands at 6.50 percent, the highest since 2007, following October 26’s unscheduled 25-basis-point (bps) hike.

Monetary authorities have now raised key rates by a total of 450 bps since May last year in a bid to temper inflation, with pauses ordered during the last four regular policy meetings.

Inflation, which again started rising in August and September, markedly slowed to 4.9 percent in October. Third-quarter gross domestic product (GDP) growth, meanwhile, rebounded to 5.9 percent from the disappointing 4.3 percent seen three months earlier.

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Both results exceeded consensus forecasts of 5.4 percent for inflation and 4.9 percent for growth. Inflation remains well over the 2.0- to 4.0-percent target while GDP growth continues to average below the 6.0- to 7.0-percent goal for the year.

The unexpectedly large drop in inflation, Capital Economics senior economist Gareth Leather said, would be “enough to persuade the central bank to leave interest rates unchanged.”

Oxford Economics Japan economist Makoto Tsuchiya said that aside from the quicker disinflation, the peso had also gained quite a bit recently due to lower US yields, which would give the BSP less incentive to hike.

Miguel Chanco, Pantheon Macroeconomics chief emerging Asia economist, also expects the BSP’s policymaking Monetary Board to hold fire, claiming that October inflation “means that a return to target range inflation this quarter remains doable.”

Domini Velasquez, chief economist at China Banking Corp., also said that lower-than-expected October inflation had boosted the case to hold rates steady.

“Upside risks to inflation also remain on the supply side, which could be addressed by nonmonetary measures,” she added.

“Most of the supply side shocks to inflation experienced in August and September did not seem to escalate to second order effects as previously feared,” Velasquez continued.

“Additionally, third quarter GDP growth, while better than expected, still fell short of the government’s target even as we have yet to feel the full impact of the BSP’s previous rate hikes.”

Philippine National Bank economist Alvin Arogo, for his part, said the central bank might also mirror the US Federal Reserve’s decision to pause at the start of the month.

“Unless new supply shocks emerge, we believe domestic interest rates are restrictive enough given the general downtrend in fixed capital formation growth,” he said.

“Therefore, we do not see the need for additional hikes, albeit the current policy rate level should be maintained for a long period,” Arogo added.

Patrick Ella, economist at Sun Life Investment Management and Trust Corp., said both inflation and third-quarter economic growth would be factored in when the BSP announces the latest policy decision.

November inflation data due in the first week of December, meanwhile, will determine whether a rate hike will be ordered a week later, he added.

“I expect BSP to decide in the December meeting because the [November] inflation report will come out a week before that, so if that will show [a] continued slowdown [the] BSP can pause; otherwise if there is another uptick in inflation then they will hike,” Ella continued.

With no urgent need to hike again, HSBC Global Research economist Aris Dacanay said he expected the BSP “to remain hawkish in tone and emphasize its readiness to hike rates if an inflation shock occurs … this is because inflation has already stayed above the BSP’s 2-4 percent target band for 19 consecutive months.”

“Keeping the tightening line open will therefore be a strong signal by the BSP of its commitment to bring inflation back to target,” he added.

Robert Dan Roces, chief economist at Security Bank Corp., also expects a pause but maintaining a balance between controlling inflation and promoting growth will remain a challenging task for monetary authorities.

“This tightening of monetary policy, although essential to temper inflation, comes with the risk of slowing down economic momentum, particularly in interest-sensitive sectors such as capital formation and consumer spending,” he noted.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., also cited easing inflation and a stronger peso as the reason for his outlook of a renewed pause.

“There is no urgency for more local policy rate hikes amid [a] stronger peso, lower global oil prices [and] better weather conditions that help ease food prices, as all of these factors are conducive to the anchoring inflation and the achievement of inflation within the 2-4 percent target by early 2024,” he said.

Ruben Carlo Asuncion, economist at UnionBank of the Philippines, said the recent October inflation and the better-than-expected economic growth print have provided “enough space for the BSP to stay put, likely until the end of this year.”

“[Hitting] the BSP’s inflation target range will take time, with the likelihood of seeing the monthly print of 4 percent or less lacking the base effect,” he added.

Monetary authorities, Bank of the Philippine Islands senior economist Emilio Neri said, “are likely to wait for more data on inflation after the surprise deceleration to 4.9 percent for October.”

On the other hand, ING Manila Bank senior economist Nicholas Antonio Mapa said “the stronger-than-expected 3Q (third quarter) GDP number opens the door for additional tightening from the BSP.”

“Robust growth coupled with hawkish statements from Bangko Sentral ng Pilipinas Governor [Eli] Remolona [Jr.] points to at least one more rate hike before the end of the year and possibly two should BSP’s inflation forecasts for 2024 remain elevated,” he added.

The BSP policy rate, Mapa said, could end the year at 7.0 percent following the December 14 policy meeting.