MANILA: Price pressures remain widespread enough to warrant another quarter-point rate hike from the Bangko Sentral ng Pilipinas (BSP) this week, according to Deutsche Bank.
In its latest note to clients, the bank said another rate hike to 5% was “necessary to further dampen the impact of price pressures on consumers and stabilise real incomes”.
The forecast is in line with the prediction of economists surveyed by the Inquirer, with 11 of 15 expecting the Monetary Board to deliver a quarter-point rate hike at its Aug 27 meeting.
If realised, the move would extend the tightening cycle that began in April and bring cumulative rate increases to 75 basis points (bps).
Deutsche Bank’s call came as the lender’s price diffusion index showed that approximately 80% of items in the country’s consumer basket by weight were still experiencing above-trend inflation, despite the easing in headline inflation in recent months.
“This suggests that inflationary pressure in the Philippines is still broad-based and that spillover effects are likely still working their way through the economy, in our view,” Deutsche Bank said.
Headline inflation decelerated for the third straight month to 6.2% in July, from a peak of 7.2% in April.
Despite the slowdown, inflation remained well above the BSP’s 3% target range.
The elevated pace of price increases has also continued to erode consumers’ purchasing power.
As it is, the BSP is weighing the persistence of above-target inflation against a weakening economy, with Governor Eli Remolona Jr signalling last week that the central bank would take a less aggressive approach to monetary tightening.
The economy grew by just 2.3% in the second quarter, its weakest expansion outside the pandemic period since late 2009.
As of July, the peso’s purchasing power had fallen to 74 centavos compared with one peso in 2018.
Deutsche Bank earlier said it expects Philippine inflation to average 5.4% by the end of the year, which is still beyond the tolerable target of the government.
Separately, Capital Economics expects the BSP to raise its policy rate by a quarter point to 5%, but said the move could mark the end of the current tightening cycle amid weakening growth.
“All told, we think policymakers will opt for a further 25bps hike next week to add to the 50bps of tightening delivered so far in this cycle,” Capital Economics said.
“But, so long as oil prices drop back as we expect, that is likely to mark the end of the tightening cycle as the BSP shifts its attention to supporting the economy,” it pointed out.
Higher borrowing costs are intended to curb spending by households and businesses, helping ease inflationary pressures but also weighing on economic activity. — Philippine Daily Inquirer/ANN
