S&P GLOBAL RATINGS and Fitch Group’s BMI Research expect another rate hike from the Bangko Sentral ng Pilipinas (BSP) within the year, citing the need for further tightening to curb faster inflation and ease pressures on the peso.
S&P said that while price pressures remain largely supply-driven, the central bank will still have to raise rates further to support economic activity.
“[W]e hold strong on our view that the current inflation trends are due to factors other than domestic demand and capacity — namely: the first tax reform package as well as higher oil prices. Nonetheless, we expect Bangko Sentral ng Pilipinas to keep its tightening bias, partly as a tool to mitigate inflation expectations and partly to counter the depreciation pressure from portfolio outflows,” S&P said in a report released late last week.
The BSP raised rates by another 25 basis points (bp) last week — a back-to-back move from its May 10 hike — noting that inflation expectations “remain elevated” for the year and amid “more volatility” in the exchange rate.
The peso has been trading at the P53 level versus the dollar since mid-June, touching fresh 12-year lows.
S&P held on to its view that the BSP will deliver three rate increases this year, which will bring the key policy rate to 3.75% from three percent as of end-2017. The central bank’s benchmark rates following last week’s adjustments now amount to three percent for overnight deposit, four percent for overnight lending and 3.5% for the overnight reverse repurchase rate.
Further tightening should help fuel economic growth to another 6.7% this year, matching 2017’s pace though falling short of the government’s 7-8% target.
S&P also expects inflation to taper off and bring the full-year average down to 3.6%, which if realized will return to the BSP’s 2-4% target range. This follows a 2.9% climb in overall prices of widely used goods last year.
“Inflation will likely stay relatively high for a few more months before the tax-induced one-off spike dissipates in the second half of the year,” the credit rater said.
Several bank economists have said that the BSP may be poised for additional rate hikes, with Governor Nestor A. Espenilla, Jr. saying that monetary authorities are navigating a “very complex environment” marked by uncertainties.
In a separate report, BMI Research noted that the BSP remains “hawkish,” thus reinforcing expectations of further tightening.
“We believe that the BSP will likely be compelled to hike interest rates further in the coming months to support the peso as the US Federal Reserve is likely to continue its interest rate normalization path, which will likely entail one more 25 bps hike this year and three more in 2019,” BMI analysts said in a June 21 note.
Mr. Espenilla said that the BSP “is prepared to take further policy action as needed” to keep prices stable.
“Indeed, core inflation has also been rising steadily to 3.6% year-on-year in May from 3.5% in April and 3.4% in March, and we are not convinced that the BSP’s 50bps rate hike so far would do enough to dampen aggregate demand,” BMI added.
Inflation clocked 4.6% in May, the fastest climb seen in at least five years. That brought the year-to-date pace to 4.1%, piercing the central bank’s 2-4% target.
The BSP has conceded to missing this year’s goal as inflation is seen at a 4.5% average for the full year, with policy makers setting sights on bringing the pace back on target next year.

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