The relentless onslaught of supply shocks would likely keep the Bangko Sentral ng Pilipinas (BSP) hawkish until next year as conditions may merit more than one rate hike.
In an interview on Bloomberg TV, BSP Governor Eli M. Remolona Jr. said the central bank is considering a rate hike in November as mounting inflationary pressures are bound to increase in the coming months.
Remolona said while Thursday’s vote to maintain policy rates was unanimous, the vote was “pretty close between hiking and not hiking.”
“We’re not convinced it [November hike] would be the last one. It won’t be the last hike in the cycle. We’re not convinced of that. As far as cuts go, output numbers have to be pretty bad and inflation numbers to be pretty low for us to consider [a] rate cut next year,” Remolona said. “We’re still, we’re still in a hawkish stance.”
He said the Monetary Board’s primary consideration was the increase in fares and electricity rates as these could add 0.5 percent to the inflation forecast of the BSP, especially in 2024.
Remolona said that while supply shocks tend to be temporary, this is not the case in the Philippines right now as petitions for transport fare hikes may be granted. This includes adjustments in commuter rail, jeepney, and taxi fares.
Further, the Supreme Court upheld the decision of the Energy Regulatory Commission (ERC) to allow power firms to pass on increases in their cost to consumers, which would likely lead to higher electricity costs.
“The supply shocks seem to dissipate fairly quickly. But the problem is there tend to be new supply shocks. And so it’s not the lags from supply shocks on inflation seem to be relatively short, except that they seem to be relentless. They keep coming. And so that’s what keeps our inflation rates high,” Remolona said.
The BSP chief added that given these risks, the decision of the United States Federal Reserve as well as efforts to protect the Philippine peso are “small things” for the BSP right now.
Nonetheless, the BSP was aware of the possible impact this may have on the economy. Remolona said the impact of the rise in key policy rates has not been felt completely in the economy.
“We think the effects of tightening will continue for about three quarters so (this will be) up to the first half of next year. We’ll see the rates; the previous hikes, weighing on the economic activity in the Philippines. The lags are long,” Remolona said.
Economists’ views
In a statement, the Bank of the Philippine Islands (BPI) said it is “necessary” for the BSP to “at least, stay on hold” in terms of key policy rates. BPI also said they also cannot rule out another rate hike, especially because of El Niño and the US Federal Reserve, which could raise rates in November.
“If the FOMC [Federal Open Market Committee] hikes again in November, and both September and October PHL inflation prints continue to exceed 4 percent, BSP might be compelled to hike one more time before 2024,” BPI said.
“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,” it added.
In the same statement, BPI said that based on the country’s historical experience, it takes “many months” before rice inflation goes back to 4 percent whenever there is a shortage of supply.
BPI noted that in 2008, 2014, and 2018, rice inflation returned to 4 percent after 21 months, 18 months, and 9 months respectively.
Based on data, BPI also said global rice prices are at a 12-year high. This could lead to retail prices staying elevated in the coming months.
Meanwhile, ANZ Research said they are maintaining their 2023 and 2024 year-end policy rate forecast at 6.25 percent. However, the think tank said they would continue to monitor the El Niño and global commodity price developments.
In doing so, ANZ Research intends to evaluate domestic inflation risks, US Federal Reserve policy moves, and the path of monetary policy, by implication.
Oxford Economics said given the extension of the BSP’s “prudent pause,” it expects the central bank to remain cautious given supply-chain disruptions and the related rise in prices. However, it is expected that the BSP will start cutting rates in the first quarter of next year.
