Philippines: BSP reiterates commitment to “take all actions” to tackle inflation

Key takeaways

• The BSP raised the benchmark overnight reverse repo rate by 50bps for the second consecutive time to 4.25% at its scheduled policy meeting today.
• The BSP’s inflation forecast for 2022 was raised yet again by 20bps to 5.60%, and that for 2023 was raised by 10bps to 4.10%; the new 2024 CPI forecast was set at 3.0%.
• The BSP reiterated its commitment to “take all actions” to bring inflation back towards target, suggesting more rate hikes down the line by perhaps another 75bps the rest of the year.

Successive 50bps hike done to combat inflation

The BSP raised the benchmark overnight reverse repo rate by an outsized 50bps for the second time in a row to 4.25% at its policy meeting today. This outcome is within our expectations as well as 19 out of 25 analysts polled by Bloomberg. This brings the total number of rate hikes to 225bps so far this year, which is the most aggressive pace of tightening within AXJ.

Rationale & policy outlook

Inflation continues to be the primary reason behind the BSP’s move to tighten monetary policy today, with the outsized hike likely premised on controlling import-led inflation following the recent drop in the PHP to record lows against the USD. In fact, BSP Deputy Governor Dakila mentioned post-meeting that the BSP’s upward revisions to the CPI forecasts are premised on recent PHP weakness and fare hikes. The BSP’s 2022 CPI forecast was revised higher by 20bps to 5.6%, and that for 2023 was revised higher by 10bps to 4.1%. The BSP’s newly set CPI forecast for 2024 is at 3.0%.

Our current 2022 inflation forecast is at 5.5%, but we admit that risks are tilted towards the upside in view of rising import-led inflation due to the PHP’s slide. Following the 0.1ppt dip in headline CPI in August, the BSP expects a pick-up in inflationary pressures again in September. We continue to expect inflation to head higher in the coming months with the peak to be around 7% in November, driven by higher import-led inflation and higher prices of food such as pork, fish, sugar due to the supply deficit. Rice prices may also rise in the Philippines as India’s broken rice export ban and export levy across most varieties of rice lifted global rice prices.

OVERNIGHT REVERSE REPO RATE RAISED BY 50BPS

Source: Bloomberg

With inflation expected to move higher in the coming months and the BSP committed to “take all actions” to bring inflation back towards target, the BSP is set to continue to tighten monetary policy in the coming months. We see scope for another 75bps of rate hikes the rest of the year, with a 50bps hike likely in November and 25bps in December.

FX implications

The BSP’s rate hike today had little impact on the beleaguered PHP, unlike its previous 50bps hike on 18 August which kept the PHP resilient amid a sell-off across most AXJ currencies that day. USD strength from a more aggressive Fed in the aftermath of last night’s FOMC meeting is the main factor pressuring the PHP lower to a record low of 58.50 today. This factor is unlikely to fade towards year-end. This, in addition to the likely widening of the Philippines’ trade and current account deficits as imports increase and export growth decelerates, would push the PHP to new record lows against the USD. Post-BSP meeting today, Dakila mentioned that the central bank is “ready to participate in the FX market versus volatility” and it is not intending to “target a particular USD/PHP level”. This suggests further drawdowns on its foreign reserves to defend the PHP. The Philippines’ foreign reserves is down by USD9.8 bn to USD99.00 bn, which is equivalent to about nine months of import cover. We see USD/PHP heading towards 59.00 for now.