BENGALURU: The Philippine central bank will raise rates by a modest 25 basis points for a second straight meeting in June, opting to move more slowly than its global peers in an attempt to cool soaring inflation, a Reuters poll forecast.
With the economy in the South-East Asian nation recovering smartly from the pandemic and inflation at a more than three-year high of 5.4%, the Bangko Sentral ng Pilipinas (BSP) is under pressure to act now to prevent the economy from overheating.
Incoming governor Felipe Medalla on Monday signalled the prospect of a series of rate hikes this year.
These could extend up to 2023 to tame inflation, and he added that he preferred a gradual unwinding of easy monetary policy.
The June 13 to 20 Reuters poll showed nearly three-quarters of economists, 16 of 22, expected the BSP to hike its key overnight reverse repurchase facility rate by 25 basis points to 2.50% at its June meeting today.
But six economists said the central bank may opt for a 50 basis point increase after the US Federal Reserve’s big interest rate hike last week and the expectation of more moves ahead to bring down high inflation.
“Arguably, the BSP does not have adequate incentives to deliver outsized rates of 50 basis points or more, even though some market expectations have shifted to a 50 basis points hike at the June meeting,” said Mizuho Bank economist Lavanya Venkateswaran.
“Not least because the BSP’s attempt to engineer a soft landing may be compromised by such aggressive actions as the economic recovery remains fragile and uneven,” she added.
With the BSP’s views on rate hikes falling short of expectations, the Philippine peso dropped to its lowest level in more than three and a half years, down nearly 6% this year.
While a depreciating peso is supportive for exports, it would add more price pressures as the pass-through of imported inflation becomes higher, pressing the central bank to go for a jumbo 50-basis point rate hike.
“BSP governor Benjamin Diokno signalled a 25 basis points increase, but we think the beleaguered currency and accelerating inflation will be enough to force a more punchy 50 basis points rate hike from BSP,” said ING senior economist Nicholas Mapa.
Economists in the poll expect the BSP to pick up its tightening pace. Nearly half, eight of 18 economists, forecast the central bank to hike rates to 3% by end-September, and two expected it to reach 3.25% or higher.
While medians showed rates at 3% by end-2022, nearly half, eight of 18 economists forecast rates at 3.5% or higher.
More interest rate rises are seen further out – from a smaller sample who had forecasts going to the end of next year, six of 11 economists forecast rates at 4% or higher, back to where they were before the Covid-19 pandemic. — Reuters