Bangko Sentral pauses again but keeps door open for November hike: BPI says


The Bangko Sentral ng Pilipinas (BSP) decided to keep its policy rate steady at 6.25% during its Monetary Board meeting on Thursday. Likewise, the overnight deposit and lending facility rates were maintained at 5.75% and 6.75% respectively.

Inflation has gone down for most of the year, but the recent uptick has shown that inflation can easily bounce back, a press release from the Bank of the Philippine Islands (BPI) said.

So far, inflation in the past month has been driven mostly by supply, but the risks of second round effects and a sustained breach of the target have increased. Because of this, the hawkish stance of the BSP is warranted.

Inflation was previously expected to return to the target of the BSP by the 4th quarter of this year. But recent developments have made this less certain.

While not our central scenario, August’s print showed that there is a significant chance that inflation could still settle above 4% by December, the press release said.

The upcoming harvest season for rice may help in stabilizing the price of the commodity.

However, local production can only cover around 85% of rice consumption and the country needs to import the rest from abroad. With the global price of rice at a 12-year high, retail prices may stay elevated in the coming months. There are also uncertainties on the ability of other countries to supply our requirements since El Nino is expected to affect their own output.

Based on historical experience, it takes many months for rice inflation to go back to 4% whenever there is a shortage in supply. In 2008, 2014, and 2018, rice inflation only returned to 4% after 21 months, 18 months, and 9 months respectively.

Oil is another upside risk to inflation especially now that price benchmarks are above $90/bbl. Favorable base effects from oil have started to fade and WTI is now around 5% higher year-on-year. Oil prices will be 17% higher year-on-year by December if global oil benchmarks stay above $90/bbl.

Given these upside risks, it is necessary for the BSP to, at least, stay on hold. We cannot rule out another hike this year since inflation can accelerate again in the next 3 months especially with El Nino on the horizon, it said.

If the FOMC hikes again in November and both September and October PHL inflation prints continue to exceed 4%, BSP might be compelled to hike one more time before 2024. While core inflation items were starting to decelerate, second round effects could make them sticky again in the next quarter or so. Rising transport costs could, for example, lead to a rebound in housing rentals and restaurant service costs.

Aside from inflation, the next move of the BSP will also depend on what the Federal Reserve will do.

The central bank has kept the door open for another hike this year as shown by the latest dot plot projection of the FOMC. So far, the probability assigned by the market to another rate hike this year is around 30-40%, but sentiment can easily shift if inflation goes up again as in previous episodes.

There is a significant chance that core inflation in the US will be around 4% by December if month-on-month inflation doesn’t fall below 0.2%. With the trade and current account deficit of the Philippines at substantial level, the BSP may find it difficult to decouple its monetary policy from that of the US.

Local bond yields may stay elevated as the BSP continues to fight inflation, with additional upward pressure from the hawkish stance of the Federal Reserve.

The Peso may move sideways for now as market players weigh substantial imports, global financial market developments, and the central banks’ future policy move.

But the behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. Once the Fed is done hiking, the Peso may strengthen as markets will likely assess the possibility of rate cuts. If a recession in the US happens, the Fed may cut its rates and the BSP will likely follow.

But in this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the still substantial current account deficit and shrinking import cover of the Philippines this year and in 2024. (PR)


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