RISING global rice prices may force the Monetary Board (MB) to hike the policy interest rate by 25 basis points later in the year, according to the HSBC Global Research.
The research arm of the bank said it expects the Bangko Sentral ng Pilipinas (BSP) MB to keep the policy interest rate at 6.25 percent for the fourth consecutive month during its meeting this week.
The MB is set to meet on September 21, Thursday.
The HSBC Global Research pointed out that the price ceiling on rice imposed by the state provided the MB with elbow room to “keep policy rates steady.”
“This cap will likely keep headline CPI [Consumer Price Index] subdued for the month,” it said in a report published on Monday.
However, the HSBC Global Research disclosed that it changed its forecast for policy rates in the fourth quarter following the “recent surge in global rice prices.”
“Due to upside risks to the CPI, we expect a 25 [basis points] hike in [the fourth quarter] 2023, subject to how much tariffs are reduced on rice,” it explained.
“A rate hike may also pre-empt the inflationary risks brought by the El Niño season,” it added.
Nonetheless, the HSBC Global Research noted that the hike would largely be dependent on the impact of the rice price cap as well as the rice tariff reductions.
“The next BSP move will likely depend on what the policy will be on rice after the price cap is lifted by the end of September,” it said.
“Our outlook, however, assumes that only limited policy action is done after the price cap is lifted,” it added.
The HSBC Global Research said the MB will “unlikely” hike the policy rate if the proposed tariff reductions “would be sufficient” to temper the acceleration in the country’s inflation rate.
“Nonetheless, we flag the risk that the CPI figure in September may be underestimated. The Philippine Statistics Authority may not be able to account for non-compliant retailers that are selling rice at a price above the price cap,” it said.
The research arm of HSBC noted that the rice price ceiling would only be able to ease price pressures in the short term but could “take a toll” on the country’s grain supply in the medium term, that would lead to price pressures.
“Due to subdued prices, domestic producers may opt not to plant rice paddies in the next harvest cycle while importers will unlikely buy rice abroad with global rice prices higher than the set cap,” it said.
The HSBC Global Research emphasized that the MB’s next move would be largely influenced by how much the tariffs on rice imports would be slashed by the national government.
“We estimate that if the tariff rate is reduced from 35 percent to 10 percent or less, the price of rice will simply return back to its level in July, when India hasn’t restricted its exports of parboiled rice yet,” it said.
“This would negate the impact of the supply shock—thus, giving the BSP no urgent reason to hike,” it added.
Rice would remain an “inflationary impulse” if the tariffs on imported stocks would remain above 10 percent, thereby forcing the MB to “resume its tightening cycle,” according to HSBC Global Research.
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