BSP rate could peak at 6.5% in 2023 – Manila Bulletin

The Bangko Sentral ng Pilipinas (BSP) may increase its benchmark rate by up to 150 basis points (bps) more over the next few quarters, taking the key rate to 6.5% by 2023, according to the bank analysts.

In a comment, analysts at the Bank of the Philippines Islands (BPI) said the BSP policy rate will still match what the US Federal Reserve does until next year.

BSP/Reuters building and logo

“If a recession occurs in the United States, the FOMC (Federal Open Market Committee) may decide to withdraw some of its hikes and bring the federal funds rate closer to 3%. In this scenario, the BSP policy rate could peak at around 6.5% in 2023. The BSP will likely make its own cuts after the Fed, but still maintaining the 100-200 basis point differential with US rates” , the bank’s analysts said. They expect the BSP to lower the policy rate to 4% at the end of 2023.

As of November 17, the central bank’s overnight borrowing rate was 5%. The BSP has raised interest rates by a cumulative 300 basis points since May this year.

BPI said the market implications of these possible rate adjustments are the continued depreciation of the peso. The peso against the US dollar is currently at the P57 level. On Monday November 21, it closed lower at P57.36 vs. P57.26 last Friday.

“We continue to expect the peso to depreciate in the near term as imports are likely to increase further as the economy recovers. Dollar demand could pick up and keep the exchange rate above the 57 level. Meanwhile, the possibility of tighter dollar supply with the new BSP documentary requirements could further contribute to dollar demand,” BPI said.

At 5%, the BSP rate is still negative, with inflation expected to remain above target until mid-2023. BSP’s latest average inflation forecast for 2022 is 5.8%. The key rate is in negative real rate if it is lower than the inflation rate.

BPI said inflation will continue to be affected by the depreciation of the peso due to higher import dependence.

“Given current conditions, we expect inflation to be around 7.5% to 7.6% in the last two months of the year. Inflation could start to decline in the first half of the year if the “Oil prices remain at current levels, but this is likely to be gradual. We expect average inflation over the whole year to remain above the BSP’s 4% target in 2023,” its analysts said.

Given that price stability is a key BSP mandate, the six policy rate increases aim to bring the path of inflation back to the target range of 2-4% by 2024.

The BSP revised its inflation forecast last week. For this year, they see average inflation at 5.8%, higher than its September 22 forecast of 5.4%. In 2023, they forecast 4.3%, up from the previous estimate of 4% and for 2024, at 3.1%, which was lower than the last forecast of 3.2%. At the end of October, the average inflation rate was 5.4%.

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Carol N. Valencia