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May 31, 2024

ING Bank says BSP losing grip on inflation, falling behind the curve

ING Bank led by bankero Han Sicat said the Bangko Sentral ng Pilipinas (BSP) would lose its grip on inflation expectations and fall behind the curve if it opts to wait for the second half of the year before adjusting policy rates.

ING Bank senior economist Nicholas Mapa said the US Federal Reserve could have hiked by a cumulative 100 basis points by the second half of the year while BSP Governor Benjamin Diokno has indicated that the central bank need not move in step with the US Fed.

Should BSP opt to sit out the first half even as inflation surges past target we could very well see BSP fall behind curve again as they did in 2018. By then with inflation raging and with Filipinos saddled with astronomically high transport costs, BSP will be losing the most important battle of its inflation targeting mandate: the battle to anchor inflation expectations,” Mapa said.

The central bank’s Monetary Board has maintained an accommodative policy stance keeping interest rates at record lows. The BSP slashed interest rates by 200 basis points in 2020 as part of its COVID-19 response measures that brought the benchmark rate to an all-time low of two percent.

“Should consumers and firms begin the believe that inflation is here and it is here to stay, credibility in the BSP’s inflation fighting capability will fade, leading to Filipinos pricing in even more inflation down the line,” Mapa said.

Once this happens, Mapa pointed out the country may fall into a price spiral with the BSP unable to corral runaway inflation expectations.

“A delay in any form of tightening to the 2H runs the very real risk of BSP losing a grip on inflation expectations and will lead to BSP behind the curve, a position not easily addressed by a token rate hike or two,” Mapa concluded.

The Monetary Board is likely to keep interest rates untouched on Thursday but is likely to make a big adjustment in its inflation forecasts.