Aggressive Rate Hikes May Be Needed

More aggressive monetary tightening by the central bank may be needed if inflation continues to accelerate, economists said.

Photo Insert: For 2023, the BSP expects inflation to average 4.1% before easing to 3% in 2024.

“To avoid de-anchoring inflationary expectations, more aggressive monetary tightening may be necessary to further slow exchange rate pass through to domestic prices,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a written message.

The Bangko Sentral ng Pilipinas (BSP) had earlier projected inflation would settle within the 7.1-7.9% range in October, well above the 2-4% target band.

“There must be flexibility not just to match but to hike more than the US Federal Reserve to avoid inflation from staying elevated for a longer period. Persistent inflation can erode future growth prospects, after all,” Neri said.

Calixto V. Chikiamco, member of the board of Institute for Development and Econometric Analysis, said in a televised interview that the BSP will raise rates later this month to tame inflation and match the Fed’s tightening.

“The government said it will match the Fed point by point so that’s probably what we can expect… We will only see deceleration when the Fed stops increasing interest rates,” he said.

The US Federal Reserve is widely expected to raise rates by three-quarters of a percentage point at its policy meeting this week, bringing the target overnight lending rate to a 3.75%-4% range.

BSP Governor Felipe M. Medalla had earlier said the Monetary Board may raise benchmark interest rates by 75 basis points (bps) at its Nov. 17 meeting if the Fed were to deliver a hike of the same magnitude. The BSP has raised rates by 225 bps this year to tame inflation.

“What will happen is we’ll see a slowdown in the economy… We’re still very positive, with the 5-6% (gross domestic product) but probably in the lower range with interest rate hikes, as this will hit the interest rate sensitive sectors like car, houses, etc.,” Chikiamco commented.

The economy expanded by 7.8% in the first half, still within the government’s 6.5-7.5% full-year target. Third-quarter GDP data is set to be released on Nov. 10. If the upper end of the BSP’s October inflation forecast were realized, this would be the fastest pace in over 14 years or since the 9.1% print in November 2008.

However, the BSP said inflation is projected to “gradually decelerate” in the next months, as “cost-push shocks to inflation due to weather disturbances and transport fare adjustments dissipate.”

“My concern is we haven’t seen the peak yet ‘cause we’re heading into the Christmas season,” Chikiamco said, adding that there is stronger demand for goods during the holidays.

“Winter is coming; therefore, oil prices globally may see a spike again and of course this is the lean season for the fish catch, therefore this may also contribute to further inflation,” he added. Neri said inflation may slow in the succeeding months, but remain above the BSP’s 2-4.0% target band.

“Inflation may slow a bit but remain well above target until well into 2024 if structural reforms to improve the supply side are not addressed and if demand factors causing currency weakness are not tempered,” he added.

Asian Institute of Management economist John Paolo R. Rivera said in a written message that inflation may continue to rise ahead of the holiday season.

“But inflation can be expected to slow down after the holidays or early 2023 due to reduced demand and impact of monetary tightening by BSP,” he added.

At its Sept. 22 policy meeting, the central bank raised its average inflation forecast for this year to 5.6% from 5.4% previously, exceeding the 2-4% target. For 2023, the BSP expects inflation to average 4.1% before easing to 3% in 2024.

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