NextGen Day

As long as domestic inflation continues high and both supply and demand side risks are still significant, the Bangko Sentral ng Pilipinas (BSP) is predicted to increase its benchmark interest rates by 25 basis points this week.

Moody’s Analytics stated that the Philippines “is battling some of the stickiest inflation in the Asia-Pacific region” in its economic preview for the week of March 20–24.

Although the rate of price increases decreased to 8.6% in February of last year from a 14-year high of 8.7%, it was hardly noticeable.

The overnight reverse repurchase (RRP) rate was increased by Bangko Sentral ng Philippines’ (BSP) Monetary Board (MB) by 50 basis points to 6 percent in February of last year, bringing the total rate increase since May of last year to 400 basis points.

According to Moody’s Analytics, factors that affect the domestic inflation rate include both supply and demand factors. For example, an increase in tourism has increased demand for lodging, transportation, and restaurant meals, which has accelerated inflation rate growth.

Due to global economic changes, oil prices are still high on the international market from a supply perspective.

The BSP will seek to avoid what it refers to as the formation of extra second-order consequences, it said, because inflation is still too high. The minor decrease in inflation in February, in contrast to the BSP’s forecast for an increase, “may give the central bank confidence to step back,” according to the author.

Domestic inflation is still a problem, according to The Market Call, a joint magazine of First Metro Investment Corporation (FMIC) and the University of Asia and the Pacific (UA&P), in its March 2023 issue.

According to the report, while the cost of various foods and transportation slowed down in the second month of this year, this was offset by a quicker increase in the cost of eggs, milk, and other dairy products.

The rate of core inflation, which does not include volatile food and energy prices, increased from 7.4 percent to 7.8 percent in the second month of this year.

“Even though core inflation YOY (year-on-year) increased more quickly in February, we shouldn’t worry about it because, in the Philippines, food and transportation prices have a lag effect on ‘non-volatile’ items,” it continued.

When the MB has its second rate-setting meeting of the year on March 23, it predicts a 25 basis point hike in the BSP rates, “with inflation likely to have peaked in January and price growth in the coming months significantly smaller than experienced in 2022.”

A similar rate increase is also predicted for the May rate-setting meeting of MB.

“If the Fed (Federal Reserve) raises its policy rates by 50 basis points, there is an upside risk in the meeting on March 21–22. BSP probably won’t want to kill the economic recovery’s momentum, it continued.

On March 21 and 22, the Federal Open Market Committee (FOMC) will meet, and it is expected that they will raise interest rates by 25 basis points.

Following the failure of two US-based banks around two weeks ago, some commentators argued that the Federal Reserve should halt or reduce its rate-hike cycle in order to restore depositor confidence and avert a potential banking catastrophe.

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