Bank of the Philippine Islands led by bankero TG Limcaoco said the likelihood of an off cycle meeting by the Bangko Sentral ng Pilipinas (BSP) is increasing amid elevated global inflation and volatile foreign exchange market.
In its latest research note, the Ayala-led bank said the chances of an intermeeting or unscheduled BSP rate hike are increasing because of oil and currency volatility. The BSP has eight policy rate-setting meetings every year.
“Kicking the can further may eventually lead to a situation that could force the BSP to hike by more than 25 basis points in one meeting, similar to what happened in 2018,” BPI said.
The 170-year old bank sees the central bank’s Monetary Board raising interest rates by 75 basis points this year, bringing the benchmark rate to 2.75 basis points.
“Even with this magnitude of increase, the policy rate will still be below historical levels and it may not have a substantial impact on growth and employment. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI added.
Last Thursday, the BSP maintained a patient hand keeping interest rates at record lows for 17 straight rate-setting meetings. After delivering 200 basis points in rate cuts in 2020 as part of its COVID-19 response measures, the BSP has maintained an accommodative monetary policy stance to allow the economy to fully recover from the impact of the global health crisis.
However, the BSP raised its inflation forecasts to 43 instead of 3.7 percent for this year and to 3.6 instead of 3.3 percent for next year.
“A more significant risk to the country’s economic prospects is the depreciation of the peso, which will increase the cost of oil that the country imports from abroad on top of the increase brought by the conflict in Ukraine,” BPI said.
It warned a surge in consumer prices due to oil might eventually hurt consumer spending and lead to slower growth.
“Hiking the policy rate will serve as a stabilizing tool that could temper the depreciation of the peso. Also, this will likely prevent a substantial decline in dollar reserves that could lead to more volatility in the local markets,” BPI said.
The Federal Open Market Committee (FOMC) expects six more rate hikes in 2022 and three hikes in 2023 based on the latest dot plot released by the US Federal Reserve.
