By Katherine K. Chan, Reporter
ANOTHER JUMBO rate hike could be in play before the yearend as the faster inflation in October adds pressure on the Bangko Sentral ng Pilipinas (BSP), economists said.
GlobalSource Partners, Inc. Country Analyst Diwa C. Guinigundo noted that the October inflation reading showed price pressures are becoming broader and more persistent.
For the former central bank deputy governor, this means a 25-basis-point (bp) rate hike might not be enough to address such risks.
“The October numbers strengthen the case for another 50-bp hike in December, rather than the usual 25 bps,” Mr. Guinigundo told BusinessWorld in a Viber message.
“More importantly, the increase is no longer confined to food: transport inflation jumped to 20.1%, while housing, utilities and fuel rose 9.3%. This suggests broader and more persistent price pressures. A 25-bp hike may therefore prove too little, too late,” he added.
University of Asia and the Pacific Economist Marco Antonio C. Agonia likewise sees higher risk for a 50-bp hike after inflation accelerated in October, with the hotter core print raising the odds of an off-cycle move.
“Odds of an off-cycle rate hike are now higher with the red-hot core inflation print,” he told BusinessWorld in an e-mail.
“A larger risk of such happening may occur if the peso-dollar rate encounters a sharp depreciation in the coming week. With incoming pump price rollbacks, the BSP may be able to ‘look through’ this spike in inflation until its next regular meeting,” he added.
Mr. Guinigundo, on the other hand, noted that an off-cycle hike may be unlikely, but the “threshold for such action has clearly become lower.”
“With headline inflation at 7.8%, core at 5.4%, and inflation expectations at risk of becoming less anchored, the BSP should be prepared to move between meetings if the inflation trajectory deteriorates further,” he added.
High energy prices continued to feed into the economy and drove up the costs of oil, transport, and utilities, pushing headline inflation to its fastest in nearly four years of 7.8% in October.
This marked the eighth straight month that inflation was above the BSP’s target.
The latest reading also breached this year’s peak of 7.2% recorded in April and September, bringing the year-to-date average to 5.6%.
Meanwhile, core inflation, which excludes volatile food and energy prices, accelerated to a three-year high of 5.4% last month from the revised 4.8% in September and 2.5% a year ago.
Last month, the Monetary Board tightened for a fourth straight meeting in a bid to chase the curve amid stubborn oil-driven price pressures and intensifying risks from a strong El Niño.
It raised its key policy rate by a larger-than-usual 50 bps to a nearly two-year high of 5.5%, bringing its cumulative hikes to 125 bps since it first tightened in April.
Nomura research analysts Euben Paracuelles and Nabila Amani have also priced in another half-point hike at the BSP’s last meeting of the year, with another 25-bp increase early next year to cap its tightening cycle.
“After hiking by a more aggressive 50 bps in October, BSP left the door wide open to further tightening and maintained its hawkish forward guidance,” they said in a report.
“We now expect BSP to hike by an additional 75 bps to 6.25%, penciling in another 50-bp hike in December and 25 bps in Q1 2027, consistent with the upward trajectory implied in our headline and core inflation forecasts over coming months,” they added.
Nomura raised its inflation forecasts for this year to 5.9% from 5.8% for the headline print, and to 4.2% from 4% for the core print.
According to Mr. Guinigundo, the BSP will also likely raise its inflation forecasts for this year until 2028 to account for the October figures and as he sees the decline in global oil prices as temporary.
The central bank projects inflation to average 6.1% this year, 6% in 2027, and 3.3% in 2028.
GROWTH RISKS
However, economists also noted that the BSP might veer away from aggressive tightening due to the country’s still sluggish economic momentum, especially if the third-quarter gross domestic product (GDP) growth comes in weak.
“Risks of a larger rate hike have increased due to the hotter inflation print for October,” Mr. Agonia said. “That said, the release of lackluster Q3 GDP figures may rein in expectations of a 50-bp hike as BSP has to consider the soft growth outlook and thus far, softer oil prices. It will also take time for the recently conducted 50-bp hike to sift through the economy.”
Meanwhile, S&P Global Market Intelligence Principal Economist Harumi Taguchi said they expect the BSP to return to their usual quarter-point increase in December amid easing oil prices and persistent global market volatility.
“While uncertainty persists and El Niño poses inflation risks, oil prices — the main driver of October’s inflation acceleration — have retreated from their surge that month. Recent global market volatility could also deter more aggressive rate hikes, if (they) persist,” she told BusinessWorld in an e-mail.
Risks of further hurting the fragile economy could also prevent the BSP from delivering another jumbo hike, Ms. Taguchi noted.
“The expected return to smaller rate hikes also reflects concerns that further aggressive tightening could hamper economic growth,” she said.
A BusinessWorld poll of 16 analysts conducted last week yielded a median estimate of 2.7% for the third-quarter GDP growth. If realized, this would be faster than the post-pandemic low of 2.3% in the second quarter, but remain slower than 3.9% a year ago.
The Philippine Statistics Authority will release the third-quarter GDP report on Nov. 9.
Last week, BSP Governor Eli M. Remolona, Jr. said the central bank remains on a tightening path as inflation continues to run hot.
However, a wider negative output gap based on the third-quarter GDP growth would reduce the odds of additional hikes, he added.
On the other hand, Capital Economics Asia Economist Gareth Leather said the BSP may stand pat at its last policy review this year on Dec. 17 unless economic developments turn favorable for another hike.
“On balance, we expect the BSP to leave rates on hold in December. Unless GDP surprises on the upside, November inflation remains strong or the peso comes under renewed downward pressure,” he said in a report.