An attendant fills a vehicle at a gasoline station in Tondo, Manila. — PHILIPPINE STAR/ RUSSELL A. PALMA

By Luz Wendy T. Noble, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) could still keep rates steady on Thursday as it waits for more proof of a robust economic recovery, although some analysts said a rate hike is likely after the strong first-quarter print.

A BusinessWorld poll of 17 analysts conducted last week showed they are divided on the BSP’s next move, with nine betting rates will remain unchanged, while eight are expecting a 25-basis-point (bp) hike.

The Monetary Board will hold its third rate-setting meeting for the year on Thursday. The key policy rate has been at a record low 2% since November 2020, when the BSP cut rates by 25 bps.

Analysts’ expectations on policy rates (May 19)

Some analysts believe that interest rates will remain untouched on Thursday to buy more time for the BSP to sift through data and ascertain if economic recovery has become entrenched.

“We believe that the BSP will not change the policy rate during its May 19 Monetary Board meeting as it is too close to the recent elections and they would likely want to digest the first-quarter gross domestic product (GDP) data in more detail,” Philippine National Bank economist Alvin Joseph A. Arogo said.

The Philippine economy expanded by 8.3% in the January to March period, a turnaround from the 3.8% contraction in the same period of 2021. The first-quarter GDP growth was faster than the 7.8% growth in the October to December period.

Despite the stronger-than-expected GDP growth in the first quarter, China Banking Corp. Chief Economist Domini S. Velasquez said there are still some economic indicators that showed some sectors have yet to recover from the pandemic.

“Looking at other leading indicators, consumer loans have only posted positive growth rates for two months; imports of durable or nonessential goods have slowed down; unemployment is back to pre-pandemic lows but recent gains in employment came from agriculture, likely due to government programs to create jobs during the pandemic; and underemployment rate remains quite high, which may indicate insufficient income for some,” Ms. Velasquez said in an e-mail.

She noted faster inflation could also eventually affect household consumption. Household spending makes up about three-fourths of the economy.

The BSP will likely wait for its next policy review and go for a 50-bp rate hike, said Ser Percival K. Peña-Reyes, associate director at the Ateneo de Manila University Center for Economic Research and Development.

He said the BSP now has to deal with increasing interest rate differentials that could attract funds back to the United States due to the Federal Reserve’s monetary policy tightening, which in turn would affect the peso’s strength. 

“This could significantly affect our trade, which depends heavily on imports,” he said.

The Fed has already increased policy rates by 75 bps through a 25-rate hike in March and another 50 bps earlier this month.

The peso closed at P52.45 against the US dollar on Friday, already 2.8% weaker from its P50.999 close in 2021.  

Meanwhile, some analysts believe the available economic data are enough for the BSP to prove that it can gradually withdraw support by raising interest rates.

“The most important change is that with GDP level now surpassing pre-pandemic levels, the BSP can focus squarely on tackling inflationary pressures. We further think that a total of 150 bps of rate hikes will be delivered this year,” ANZ Research Chief Economist for Southeast Asia and India Sanjay Mathur said.

Socioeconomic Planning Secretary Karl Kendrick T. Chua on Thursday has confirmed that Philippine GDP level is already beyond where it was in 2019, before the crisis. At constant 2018 prices, the size of the Philippine economy in the first quarter was valued at P4.618 trillion, already beyond the P4.463 trillion in the first three months of 2019.

Economic managers previously expected the economy will reach its pre-pandemic level only by the second half of 2022.

Headline inflation accelerated to a three-year high of 4.9% in April, reflecting the faster increase in food, utilities, and transport prices. This is already beyond the central bank’s 2-4% target range.

Last month, BSP Governor Benjamin E. Diokno said they may consider a rate hike in June. At that time, he said there is still no evidence of second-round effects from the demand side reflected by wage or fare hikes.

The Department of Labor and Employment this Saturday approved a P33 increase for the daily minimum wage in Metro Manila and by P55 to P110 for the Western Visayas Region. Meanwhile, several transport groups have also filed petitions to raise fares as pump prices continue to climb.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said economic recovery indicators reflect how monetary policy response is “already late.”

“Aside from credibility risk, the direct cost of avoiding a rate hike such expensive non-monetary measures (foregone revenues from lower tariffs, direct subsidies, direct imports of fish) are piling up and may be better allocated to other program priorities like education, health, etc,” Mr. Neri said.

“A May 19 hike also helps reduce speculation that all the consequences of rate hikes are being passed on to the new administration,” he added.

The BSP may also be looking at recent moves by its regional counterparts, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said.

“The likelihood of a hike this May is higher (50%+ higher) because of hotter-than-expected 1Q22 GDP growth print. BSP may also be looking at the signs on the wall from regional moves lately,” he said.

Last week, Bank Negara Malaysia in a surprise move raised its key policy rate by 25 basis points, as it tries to tame inflation. Singapore also tightened its monetary policy last month, while Indonesia and Thailand maintained rate settings.

At its March 24 meeting, the BSP raised its inflation forecast to a beyond-target 4.3% for 2022, factoring in the impact of the Russia-Ukraine war on commodity prices. It kept rates steady, citing the need to keep support to economic recovery.

A rate hike would be the first since 2018, when the central bank increased rates by 175 bps to curb inflation.