Bangko Sentral tightening cycle far from over

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is expected to continue hiking rates despite easing fears of a prolonged oil crisis following the US-Iran peace deal, though policymakers still face a delicate balancing act between controlling inflation and supporting economic growth.

On Thursday, the central bank raised its benchmark interest rate by 25 basis points to 4.75 percent, its second rate increase this year as policymakers sought to address still-elevated inflationary pressures.

READ: BSP hikes policy rate by 25 bps to 4.75%

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Deepali Bhargava, economist at ING Bank, described the quarter-point move as a “cautious” hike that points to a “steady tightening bias,” with future adjustments likely to favor smaller moves to limit market volatility.

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“Policymakers are clearly not complacent about oil prices, viewing the recent oil price shock as potentially more persistent given ongoing uncertainty around supply normalization even amid a ceasefire,” she said.

“In our view, the BSP is not losing sleep over this, but neither can it confidently say that the worst is over, keeping policy firmly in watch-and-act mode. We maintain our forecast of another 50bp rate hike this year,” she added.

Already, BSP officials have signaled that more measured hikes remain a possibility, saying they are more inclined to take “baby steps” to avoid “disturbing the market” with bigger moves.

For New York-based think tank GlobalSource, the debate has now shifted from whether rates should rise to how much further they should go.

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“The choice between a 25-basis-point and a 50-basis-point increase reflects a deeper policy dilemma: how to reinforce the BSP’s inflation-fighting credibility without unnecessarily amplifying downside risks to economic growth,” GlobalSource said.

Higher borrowing costs are intended to temper consumer and business spending, helping ease inflationary pressures.

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However, tighter monetary policy could also weigh on economic activity by making loans more expensive for households and businesses.

But the think tank said an off-cycle or aggressive response was unlikely, with the BSP’s approach ultimately hinging on preserving its credibility in managing inflation.

“All up, therefore, the BSP’s challenge is no longer merely to lower inflation. It is to preserve the credibility of the inflation-targeting framework itself,” it said.

“Once expectations become unanchored, the economic cost of restoring price stability rises significantly. The current policy decision is therefore as much about managing expectations as it is about managing interest rates,” it added.

Caught on the more hawkish side was HSBC, which had expected a more aggressive half-point hike, arguing that inflation concerns would outweigh risks from slowing growth.

Still, the bank said the modest hike reflected the opportunity created by improving oil market conditions following the peace deal.

The BSP’s next policy meeting is scheduled for Aug. 27.

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By then, policymakers would already be factoring in inflation data for June and July, as well as second-quarter gross domestic product figures. INQ