BSP to hike rates by 25 bps next month, sees lower Feb. inflation — Medalla

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said they will do another 25 basis points (bps) rate increase on March 23 on expectation of a lower inflation for the month of February, or lower than January’s actual rate of 8.7 percent.

Medalla told reporters late Friday, Feb. 24, that it is very likely that a smaller 25 bps rate hike versus 50 bps last Feb. 16, is possible if there is a negative month-on-month change in the February inflation. The BSP will release its inflation forecast for February on Tuesday. The next policy rate meeting is on March 23.

“If I were to take a bet, 25 (bps) is the most likely (rate hike),” said Medalla on the sidelines of the annual reception for bankers at the BSP, also called “Bankers’ Night”.

“We’re hoping non-monetary measures will finally become effective,” he added. He said there are already signs that it could bring inflation lower especially with the importation of sugar and other products.

Medalla said it is difficult to say if March 23 will be the last rate increase. However, while the “most likely scenario (is) maybe one more” rate increase, if the February inflation does turn out to be lower as they expect it to be, then the Monetary Board will not adjust rates higher next month, he said.

“One scenario where it is not necessary is a negative month-on-month. If it turns out that prices are lower in February than in January, why should we (raise rates)? I’m hoping to be pleasantly surprised kasi mukang talagang bumibilis na ang imports (because imports are coming faster),” said Medalla.

The BSP chief expects inflation will come down to below four percent year-on-year by November or December this year, and closer to the two percent to four percent government target range. The BSP’s full-year forecast is an average of 6.1 percent inflation for 2023 and 3.1 percent next year.

“There’s a great possibility that if the non-monetary measures start working, then January will be the highest already,” said Medalla.

He said the Department of Finance and the National Economic Development Authority have convinced Malacanang to do more importation, and this will help manage inflation better.

However, he said that if inflation is still high, and they are looking mostly on month-on-month inflation — “whatever happens because of sheer momentum, year-on-year, (inflation) will be high.”

Medalla earlier said they could increase the key rate by 25 bps to 50 bps. But even if they raise only by 25 bps next month, he said the Monetary Board’s policy stance is still hawkish, or in a tightening mode.

“We’re hawkish for a reason, it’s the data. If month-on-month is 1% which implies a year-on-year of 12, we have to act,” he said. Rentals and restaurant prices will still contribute to high inflation in some months.

Meantime, Medalla said the number of times that the year-on-year inflation is outside of the BSP forecast band is a point estimate of 0.4 percent, which means it happens once in 10 or 20 months.

“Data is fluid, it’s hard to forecast too much in advance. When you look at it historically, what we’re seeing is already unusual because in the past, 15 straight months of above four percent headline inflation is the longest already. Now, the way it looks, it could be as long as 18-19 straight months, depending on the scenario. The longest number of months that we’re off target was 24 months. Supply shocks can last a long time,” said Medalla.

On a quarterly basis, the central bank forecasts inflation will average at 7.7 percent in the first six months of this year. By the third quarter, it should be at 5.4 percent. By the last quarter of the year, the BSP expects inflation to settle around 3.8 percent.

The BSP has raised the policy rate by 400 bps since May 19, 2022. Before May last year, the policy rate was frozen at its lowest level of two percent from Nov. 19, 2020.

The BSP initially increased the rates gradually with two 25 bps adjustment in May and on June 23 last year, followed by a surprised 75 bps off-cycle move on July 14, in reaction to the jumbo rate hikes by the US Federal Reserve. To keep a decent rate and peso-US dollar differential, the BSP again increased the key rate by 50 bps each on Aug. 18 and Sept. 22, followed by a 75 bps hike on Nov. 17 and 50 bps on Dec. 15. The last rate hike was 50 bps this month.