Next BSP hike may be 50 bps — DB Research

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) could raise its policy rate by 50 basis points (bps) in its next tightening move, as analysts at Deutsche Bank (DB) Research warned that inflation expectations are becoming unanchored.

Deutsche Bank Research said the central bank will likely be more aggressive in tightening monetary policy following BSP Governor Eli M. Remolona, Jr.’s latest hint of an off-cycle rate hike.

“We read its announcement for an off-cycle hike as a signal that inflation expectations are unanchoring, which thus calls for more decisive action to be taken, given that April’s 7.2% year-on-year inflation,” Deutsche Bank Research said in a report published on Monday.

This came after Mr. Remolona’s interview aired on Money Talks with Cathy Yang last Friday where he said the Monetary Board is considering delivering its second straight interest rate hike before their scheduled June 18 policy meeting.

For Deutsche Bank Research, this could mean that the policy rate will be raised to 5% on or before the Board’s next policy review.

“We expect BSP to now hike by 50 bps at its next meeting, whether off-cycle or its scheduled one on 18 June, as it takes a stronger stance in managing inflation expectations,” it said.

The central bank first hiked by 25 bps in April, after one-and-a-half years of easing, to raise the benchmark borrowing cost to 4.5%.

BSP officials said the latest move came as a preemptive measure to control broader second-order price effects and keep inflation expectations anchored amid growing risks from the Middle East war.

Mr. Remolona has left the door open to further tightening, noting that the central bank seeks to uphold its price stability mandate and bring the headline print back to its 3% target.

It can be recalled that inflation settled past the BSP’s 2%-4% tolerance band for a second consecutive month after accelerating to 7.2% in April from 4.1% in March.

Deutsche Bank Research likewise expects the BSP to continue tightening in August, with a projected 25-bp hike to bring the key interest rate to 5.25%.

“We also expect BSP to continue tightening in August by 25 bps (for now), which effectively brings 75 bps more in policy rate increases to 5.25% by August, against our initial 50-bp expectation,” it said.

PALACE MEETING
Meanwhile, Malacañang said the government is working closely with the BSP to preserve economic stability and protect consumers from rising prices.

“The economic team and the BSP are working in sync in maintaining macroeconomic stability and safeguarding the purchasing power of Filipinos,” Palace Press Officer Clarissa A. Castro told a news briefing in Filipino on Monday.  

Her remarks came after Mr. Remolona signaled that a gradual peso depreciation could still be manageable amid external pressures, including rising global oil prices, shifts in US interest rates and market sentiment.

President Ferdinand R. Marcos, Jr. met with BSP officials and the Development Budget Coordination Committee in Malacañang on Monday to discuss economic concerns, although the Palace did not disclose the agenda.

Ms. Castro said the Executive and the BSP “will do everything to prevent the depreciation of the peso.”

“We know what we are facing; this is not just a local problem. If we are not facing global oil prices, there is the interference of other groups in our government,” she added.

An analyst said Mr. Remolona’s stance on limiting the central bank’s foreign exchange (FX) market intervention to smoothening out sharp inflationary swings rather than preventing a specific level proves “realistic and transparent” considering its primary mandate.

Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., noted that the BSP chief’s signal of allowing a gradual peso depreciation, even potentially to the P63.50-a-dollar level, aligns with the central bank’s duty to manage FX volatility that could trigger inflation.

“The Philippines runs a flexible exchange rate system, meaning the BSP does not defend a specific level of the peso. Its job is to manage volatility, not dictate prices,” he said in a post on Facebook. “Trying to fix the currency at an arbitrary level would be costly and ultimately ineffective given global market forces.”

Meanwhile, a trader told BusinessWorld that the central bank can only prevent excessive volatility in the FX market but not counter trends that are behind the peso’s recent decline.

“(The) BSP maintains presence in the FX market to smooth out volatility or sharp swings and does not target a specific exchange rate,” the trader said in a Viber message. “Thus, it cannot break or counter a market trend but rather the central bank aims to limit outsized and excessive day-to-day volatility.”

Since the United States and Israel’s initial attack on Iran on Feb. 28, the peso’s movements have been largely driven by global factors such as the dollar’s strength, investors’ risk-off sentiment and still elevated oil prices, according to Mr. Ravelas.

Japan-based MUFG Bank Ltd. earlier noted that the peso, as of May 18, has fallen by 6.6% against the greenback since the war erupted, the worst seen among several Asian currencies.

The local unit continued to sink to new record lows this month as uncertainties surrounding the Middle East war sustained safe-haven demand for the US dollar. It closed at a fresh low of P61.75 versus the greenback on May 18 and 19.

However, Mr. Ravelas said it is more important to monitor the peso’s spillover effects on consumer prices rather than the mere exchange rate.

“The key question is not whether the peso is at P60 or P63, but whether that movement is feeding into higher prices,” he said. “If it does, the BSP will act — through rates or liquidity tools. If it doesn’t, some flexibility is actually healthy for the economy.”

Meanwhile, Lloyd Chan, a senior currency analyst at MUFG Global Markets Research, noted that the local currency will remain vulnerable to global oil prices and higher US yields.

“(Philippine peso) appears particularly vulnerable, given the sharp rise in inflation and a BSP policy rate of just 4.5% that is insufficient to compensate for the rising risk premium,” he added in a report on Monday.

The BSP chief had noted that a weak peso could also boost the country’s exports, which could help narrow the country’s current account deficit.

For the trader, the BSP will likely keep its intervention minimal to “balance keeping exports competitive while at the same time ensuring imported inflation is mitigated.”

“In fact, a weaker peso is not purely negative,” Mr. Ravelas also said. “It can support exports, boost remittances, and help narrow the country’s external deficit — so it’s always a balance.”

“So, from a market standpoint, I would say the Governor was simply being realistic and transparent,” he added. “Investors actually prefer that kind of clarity.”

Meanwhile, MUFG’s Mr. Chan noted that a peso recovery would require a concrete peace deal between Iran and the US to reopen the Strait of Hormuz, as this would signal that global oil trade could finally renormalize. — with Chloe Marie A. Hufana