Intellasia East Asia News – Painful battle against inflation continues as BSP hikes rates anew

The Bangko Sentral ng Pilipinas hiked interest rates by 50 basis points on Thursday amid a painful battle to control rapid inflation and growing pressure to match the US Federal Reserve’s aggressive actions.

The latest adjustment put the BSP’s benchmark rate, which banks typically use as basis when charging interest on loans, at 4.25%. In a statement released after its meeting, the powerful Monetary Board said “price pressures continue to broaden.”

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What the BSP’s rate hike means for you

“The rise in core inflation indicates emerging demand-side pressures on inflation. Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases,” the Board said in a statement.

“Nonetheless, inflation expectations continue to be broadly anchored over the medium term.”

It was nevertheless a widely expected move by the BSP, which met after its US counterpart decided last night to sustain its aggressive tightening by hiking rates by 75 basis points to fight stubbornly high inflation stateside.

At home, the BSP is struggling to control a multi-year high inflation that’s soaring above its 2-4 percent target. From its old projection of 5.4%, the central bank now forecasts inflation to average 5.6 percent this year. Price growth is expected to stay slightly above target next year at 4.1%, the BSP said, before returning within the target in 2024 at 3.0%.

At the same time, the series of outsized rate hikes in the US is sinking the Philippine peso to record-lows after record-lows, forcing the BSP to become one of the most hawkish central banks in the region. On Thursday, the local currency finished at a new historic-low of P58.49 versus the US dollar.

Gareth Leather, senior Asia economist at London-based Capital Economics, believes more rate hikes are likely in the near term, but the tightening cycle will be over by the end of the year. The Monetary Board still has two meetings scheduled for the year.

“We think further tightening is likely in the near term, but with inflation having probably peaked and the economic recovery likely to struggle over the coming months, the tightening cycle is likely to be over by end of the year,” he said in an emailed commentary.

“Overall, we are expecting a further 75bp of hikes this year, but we think the tightening cycle will come to a finish before the end of 2022. In contrast, most other analysts are expecting further tightening next year,” he added.

But Miguel Chanco, chief Emerging Asia economist of UK-based Pantheon Macroeconomics, said it might be time for the BSP to go slow with its rate hikes to avoid pushing the economy to another collapse.

“We suspect that the peso’s sell-off to new lows is the main reason that the BSP did not deviate from its current path,” Chanco said in a separate commentary.

“All told, we continue to believe that the Board will come to its senses soon, and pause its overly-aggressive hiking cycle in the immediate future. Crucially, the economy isn’t as strong as the BSP thinks it is, with a technical recession still very much on the cards after the Q2 contraction,” he added.


Category: Philippines

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