Price pressures remain widespread enough to warrant another quarter-point rate hike from the Bangko Sentral ng Pilipinas (BSP) this week, according to Deutsche Bank.
In its latest note to clients, the bank said another rate hike to 5 percent was ‘necessary to further dampen the impact of price pressures on consumers and stabilize real incomes.’
The forecast is in line with the prediction of economists surveyed by the Inquirer, with 11 of 15 expecting the Monetary Board to deliver a quarter-point rate hike at its Aug. 27 meeting.
If realized, the move would extend the tightening cycle that began in April and bring cumulative rate increases to 75 basis points (bp).
Deutsche Bank’s call came as its price diffusion index showed that around 80 percent of items in the country’s consumer basket by weight were still experiencing above-trend inflation, despite the easing in headline inflation in recent months.
‘This suggests that inflationary pressure in the Philippines is still broad-based and that spillover effects are likely still working their way through the economy, in our view,’ Deutsche Bank said.
Headline inflation decelerated for the third straight month to 6.2 percent in July, from a peak of 7.2 percent in April.
Despite the slowdown, inflation remained well above the BSP’s 3-percent target range.
The elevated pace of price increases has also continued to erode consumers’ purchasing power.
As of July, the peso’s purchasing power had fallen to 74 centavos compared with P1 in 2018.
Deutsche Bank earlier said it expects Philippine inflation to average 5.4 percent by the end of the year, which is still beyond the tolerable target of the government.
Weakening economy
As it is, the BSP is also weighing the persistence of above-target inflation against a weakening economy, with Governor Eli Remolona Jr. signaling last week that the central bank would take a less aggressive approach to monetary tightening.
The economy grew by just 2.3 percent in the second quarter, its weakest expansion outside the pandemic period since late 2009.
Separately, Capital Economics also expects the BSP to raise its policy rate by a quarter point to 5 percent, but said the move could mark the end of the current tightening cycle amid weakening growth.
‘All told, we think policymakers will opt for a further 25bp hike next week to add to the 50bp of tightening delivered so far in this cycle,’ Capital Economics said.
‘But, so long as oil prices drop back as we expect, that is likely to mark the end of the tightening cycle as the BSP shifts its attention to supporting the economy,’ it added.
Higher borrowing costs are intended to curb spending by households and businesses, helping ease inflationary pressures but also weighing on economic activity.