Bangalore (Reuters) -A Reuters poll predicts that the Philippine central bank will raise rates by a small 25 basis points at its next meeting in June. In an effort to slow down the country’s skyrocketing inflation, the bank will move more slowly than other central banks around the world in an effort to raise rates.
The Southeast Asian country’s economy is doing well after the pandemic, and inflation is at its highest level in more than three years, at 5.4%. This puts pressure on the Bangko Sentral ng Pilipinas (BSP) to take action right away to stop the economy from getting too hot.
On Monday, the new governor, Felipe Medalla, hinted that there could be a series of rate hikes this year that could last until 2023. He also said that he preferred a slow end to easy monetary policy.
According to a Reuters poll conducted between June 13 and June 20, 16 of 22 economists expected the BSP to raise its key overnight reverse repurchase facility rate by 25 basis points to 2.50 percent at its June 23 meeting.
But six economists said that after the U.S. Federal Reserve’s big interest rate hike last week and the expectation of more moves to bring down high inflation, the central bank may choose to raise rates by 50 basis points.
Lavanya Venkateswaran, an economist at Mizuho Bank, said, “It could be argued that the BSP doesn’t have enough incentives to give outsized rates of 50bp or more, even though some market expectations have changed to a 50 bp hike at the June 23 meeting.”
“Not least because the BSP’s plan for a soft landing could be hurt by such aggressive actions while the economic recovery is still weak and uneven,” she said.
With the BSP’s views on rate hikes falling short of what was expected, the Philippine peso fell to its lowest level in more than three and a half years, down nearly 6 percent this year.
Even though a falling peso is good for exports, it would put more pressure on prices as the pass-through of imported inflation goes up. This would force the central bank to raise rates by a huge 50 basis points.
“BSP Governor Benjamin Diokno said that the rate would go up by 25 basis points, but we think that the weak currency and rising inflation will force the BSP to raise rates by 50 basis points instead,” said Nicholas Mapa, a senior economist at ING.
In the poll, economists said they think the BSP will speed up its tightening. Nearly half, or 8 of the 18 economists, thought that the central bank would raise rates to 3% by the end of September. Two economists thought that rates would go up to 3.25 or higher.
Even though the median said that rates would be 3% by the end of 2022, 8 of the 18 economists said that rates would be 3.5% or higher.
More interest rate increases are expected in the future. Of a smaller group of economists who made predictions through the end of next year, 6 of 11 predicted rates of 4% or more, which is where they were before the COVID-19 pandemic.
