By Md Manzer Hussain
BENGALURU (Reuters) -The Philippine central bank will raise rates by a modest 25 basis points for a second straight meeting in June, opting to move more slowly than its global peers in an attempt to cool soaring inflation, a Reuters poll forecast.
With the economy in the Southeast Asian nation recovering smartly from the pandemic and inflation at a more than three-year high of 5.4%, the Bangko Sentral ng Pilipinas (BSP) is under pressure to act now to prevent the economy from overheating.
On Monday, incoming governor Felipe Medalla signalled the prospect of a series of rate hikes this year that could extend up to 2023 to tame inflation, adding he preferred a gradual unwinding of easy monetary policy.
The June 13-20 Reuters poll showed nearly three-quarters of economists, 16 of 22, expected the BSP to hike its key overnight reverse repurchase facility rate by 25 basis points to 2.50% at its June 23 meeting.
But six economists said the central bank may opt for a 50 basis point increase after the U.S. Federal Reserve’s big interest rate hike last week and the expectation of more moves ahead to bring down high inflation.
“Arguably, the BSP does not have adequate incentives to deliver outsized rates of 50bp or more, even though some market expectations have shifted to a 50 bp hike at the June 23 meeting,” said Lavanya Venkateswaran, economist at Mizuho Bank.
“Not the least because the BSP’s attempt to engineer a soft landing may be compromised by such aggressive actions as the economic recovery remains fragile and uneven,” she added.
With the BSP’s views on rate hikes falling short of expectations, the Philippine peso dropped to its lowest level in more than three and a half years, down nearly 6% this year.
While a depreciating peso is supportive for exports, it would add more price pressures as the pass-through of imported inflation becomes higher, pressing the central bank to go for a jumbo 50 basis point rate hike.
“BSP Governor Benjamin Diokno signalled a 25 bp increase but we think the beleaguered currency and accelerating inflation will be enough to force a more punchy 50 bp rate hike from BSP,” said Nicholas Mapa, a senior economist at ING.
Economists in the poll expect the BSP to pick up its tightening pace. Nearly half, 8 of 18 economists forecast the central bank to hike rates to 3.00% by end-September, and two expected it to reach 3.25% or higher.
While medians showed rates at 3.0% by end-2022, nearly half, 8 of 18 economists forecast rates at 3.50% or higher.
More interest rate rises are seen further out – from a smaller sample who had forecasts going to the end of next year, 6 of 11 economists forecast rates at 4.00% or higher, back to where they were before the COVID-19 pandemic.
(Reporting by Md. Manzer Hussain; Polling by Devayani Sathyan; Editing by Ross Finley and Alex Richardson)
