Philippines: tightening cycle still has some legs
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Philippines: tightening cycle still has some legs

The central bank in the Philippines (BSP) today raised its policy rate by a further 50bps to 3.75%, and gave a strong indication that more rate hikes are likely over the coming months. That said, with inflation set to peak soon and headwinds to the economic recovery mounting, we don’t think the tightening cycle will run much beyond the second half of this year.
  • The central bank in the Philippines (BSP) today raised its policy rate by a further 50bps to 3.75%, and gave a strong indication that more rate hikes are likely over the coming months. That said, with inflation set to peak soon and headwinds to the economic recovery mounting, we don’t think the tightening cycle will run much beyond the second half of this year.
  • Today’s move by the BSP was a touch more aggressive than most had anticipated; we and the consensus had expected a 25bp hike. Rates have now been raised by 175bps so far in this cycle, which included a 75bp rate hike at an unscheduled meeting in July.
  • The main worry for the central bank is inflation, which hit a four-year high of 6.4% y/y in July, up from 3.0% at the start of the year. (See Chart 1.) In the press conference today, BSP Governor Felipe Medalla struck a hawkish tone. He noted that “elevated inflation expectations highlight the risk of further second round effects” and stated that the central bank was “ready to take further necessary actions to steer inflation towards a target-consistent path”.
  • The central bank is also concerned about the weakness of the peso which, despite some recent relief, has weakened by close to 10% against the US dollar since the start of the year. (See Chart 2.) Underscoring this, Governor Medalla stated that the BSP was keeping a close eye on how the US Fed’s hiking cycle evolves. A relatively low level of foreign-currency debt means a fall in the peso does not pose a major threat to financial stability. However, it could put further upward pressure on inflation.
  • However, while inflation is likely to remain elevated over the coming months, it should start to ease soon and drop back to below target by the second quarter of next year. A fall in oil prices and more beneficial base effects will lead to a drop in transport price inflation.
  • Meanwhile, slower growth should also put downward pressure on underlying price pressures. GDP contracted in the second quarter of the year, and we expect growth to remain below-trend in the second half of 2022 as exports struggle and higher prices along with rising interest rates weigh on consumer spending.
  • Bringing all of this together, today’s hawkish comments reaffirm our view that further tightening is likely in the near term. We have two more 25bp rate hikes pencilled in for the BSP’s next two meetings in September and November, but the risks to those forecasts are clearly to the upside. Beyond that however, with inflation set to start falling back and growing set to slow, the tightening cycle should draw to a close.

Chart 1: Philippines Consumer Prices
(% y/y)

Chart 2: US Dollar vs Philippines Peso

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Gareth Leather, Senior Asia Economist, gareth.leather@capitaleconomics.com

Gareth Leather Senior Asia Economist
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