April hike would be ‘rash,’ says Pantheon Macroeconomics

By Katherine K. Chan, Reporter

RAISING the key policy rate would be a “rash” move even as headline inflation is expected to breach the Bangko Sentral ng Pilipinas’ (BSP) target band by the second half of the year, Pantheon Macroeconomics said.

In a report on Monday, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said an April hike is now “on the table” but the central bank will likely stand pat until next year.

“More aggressive, even if ‘staggered,’ fuel price increases were implemented by the Philippines’ main oil retailers last week, to the point where a target reverse repo rate hike by the Bangko Sentral ng Pilipinas next month is now on the cards,” they said.

However, Mr. Chanco and Ms. Gupta noted that it would be reckless of the BSP to tighten next month as inflation pressures prove supply-driven and amid lingering growth woes.

“Whether or not the Board should hike, however, is a separate question,” Mr. Chanco told BusinessWorld in an e-mail. “From our standpoint, we think that it would be rash.”

“This is not a repeat of 2022, when the economy was booming and global food prices (were) skyrocketing in tandem, which made the energy crisis in 2022 much worse from an inflation standpoint. Fundamentally, there’s also little monetary policy can do to mitigate a supply-side inflation shock,” he added.

Earlier this month, BSP Governor Eli M. Remolona, Jr. said global oil prices staying above $100 per barrel could drive inflation past their 2%-4% target, which could prompt the Monetary Board to lift its key rates.

Finance Secretary Frederick D. Go also said that consistently high energy prices will push the Board to consider tightening as early as next month.

If realized, the central bank would be ending its near two-year easing cycle. Since August 2024, it has slashed the benchmark borrowing rate by a total of 225 basis points (bps) to an over three-year low of 4.25%.

Meanwhile, China Banking Corp. (Chinabank) Chief Economist Domini S. Velasquez said the BSP will likely maintain a “wait-and-see stance” in the near term, noting that monetary policy may not be as helpful considering the current macro backdrop.

“The current oil shock is largely supply-driven, meaning monetary policy has limited ability to offset its impact on prices,” Ms. Velasquez told BusinessWorld in an e-mail.

She said demand conditions remain “soft,” as the central bank estimates a negative output gap through at least next year.

“Given these factors, the BSP is likely to adopt a wait-and-see stance, allowing the effects of the oil shock to play out before making further policy adjustments,” she added.

On the other hand, Deutsche Bank Research said the BSP’s easing cycle likely hit a dead-end, with tightening now possible in the next meeting as the Middle East war drags on.

“Within Asia, as we warned earlier, rising oil prices point to no further rate cuts by BI (Bank of Indonesia) and BSP, with the latter potentially hiking as early as April,” it said in a separate report.

INFLATION OUTLOOK
Pantheon economists said in their report that it is “highly unlikely” for inflation to reach levels last seen in 2022 or when the headline print ranged between 6% and 8% amid Russia’s invasion of Ukraine.

Still, Pantheon now sees inflation breaching 4% from June to September to average 3.8% for the entire 2026, higher than their previous estimate of 3.2%.

If realized, inflation will exceed the BSP’s 3.6% forecast for the year.

“Restarting a rate-hiking cycle now, so soon after the most recent cut in February, would be a blow to the corporate sector too,” Mr. Chanco and Ms. Gupta added. “The BSP’s credit access index remains in the red despite 225 bps in policy rate cuts since late-2024.”

On the other hand, DBS senior economists Chua Han Teng and Radhika Rao said oil price shocks will likely lead to higher food prices, which would affect the Philippines considering food and nonalcoholic beverages comprise about 38% of its consumer price index basket.

“Food carries a significant weight in ASEAN-6’s consumer price index basket, at 20-36%, with Thailand, Vietnam, and Philippines the most vulnerable to accelerating food prices,” they said.

However, Mr. Chanco and Ms. Gupta noted that the suspension of excise tax on fuel would help tame inflation.

“We see a number of reasons why the Board should hold fire,” they said. “For a start, legislation to suspend excise taxes on fuel is now awaiting the President’s signature, a move that we think would be just about enough to stop headline inflation from surpassing the key 4% mark; our 2026 projection would fall to 3.5%.”

Under the 2017 Tax Reform for Acceleration and Inclusion law, the National Government (NG) imposes an excise tax of P10 per liter on gasoline, P6 per liter on diesel and P5 per liter on kerosene.

The NG is seeking to suspend this levy to ease the burden of soaring pump prices on consumers.

As of Monday, a bill authorizing the President to suspend or cut excise tax on petroleum products amid economic emergencies is awaiting President Ferdinand R. Marcos, Jr.’s signature.

Meanwhile, Mr. Chanco noted that the peso’s latest plunge to a record low is not a major concern for the BSP’s second policy review of the year on April 23.

“I doubt that the peso will be too much of an issue for the BSP next month, as it’s not as if the PHP (Philippine peso) is under specific pressure. Most currencies in Asia are feeling the pinch,” he told this paper.

On Monday, the local unit slumped to a fresh low of P60.30 against the greenback after falling by 20 centavos from its P60.10-per-dollar finish on Thursday.

Chinabank’s Ms. Velasquez also sees economic growth weakening amid the widening oil shocks, shifting the pressure to fiscal policy to support the economy.

“Given the sharp rise in oil prices and their spillover to a broad range of goods, we expect growth to come in weaker than previously anticipated this year,” she said. “Higher fuel costs are likely to weigh on household consumption and could lead to some uptick in unemployment as firms adjust to rising input costs.”

“Overall, there remains scope for fiscal policy to play a more active role in supporting growth, especially as monetary policy faces limits in addressing a supply-driven shock,” Ms. Velasquez added.