By Lawrence Agcaoili | The Philippine Star
September 19, 2023
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may resume its tightening cycle by hiking key policy rates before the end of the year amid the recent surge in global rice prices, according to economists.
Aris Dacanay, economist for ASEAN at HSBC, said the BSP is likely to keep interest rates unchanged this week, but may deliver another 25-basis-point hike before the end of the year as inflation accelerated to 5.3 percent in August after easing for six straight months to 4.7 percent from a peak of 8.7 percent in January.
“We change our call for the fourth quarter of 2023 and pencil in another 25-basis-point hike to 6.50 percent in consideration of the recent surge in global rice prices. The hike, however, will be inter-policy dependent. The BSP will unlikely hike the policy rate if the planned tariff reduction on rice is sufficient,” Dacanay said.
The British banking giant originally expects the BSP to keep the benchmark interest rate untouched at 6.25 percent for the rest of the year.
Due to a wide current account deficit and the renewed strength of the dollar, Dacanay said the BSP may cut its policy rate only after the US Federal Reserve cuts its own interest rate.
“Our baseline forecast is for the Fed to begin its easing cycle in the second quarter of 2024,” he said.
HSBC expects the BSP to cut key policy rates by a total of 75 basis points next year, with 25 basis points starting in the second quarter up to the fourth quarter of 2024.
According to Dacanay, the price cap imposed on rice by Malacañang starting Sept. 5 gives the BSP time to keep policy rates steady.
President Marcos issued Executive Order 39 imposing a price cap of P41 per kilo on regular milled rice and P45 per kilo on well-milled rice as the price spiked to P53 from P40, synchronized with the 20 percent jump seen in the global benchmark prices of rice.
“This was a result of India announcing its restrictions on all varieties of rice exports. This cap will likely keep headline CPI (consumer price index) subdued for the month,” Dacanay said.
Nonetheless, the economist said HSBC flags the risk that the CPI figure in September may be underestimated as the Philippine Statistics Authority may not be able to account for non-compliant retailers that are selling rice at a price above the price cap.
“However, nuances matter. Although a price cap can help ease price pressures in the short term, the price cap may take a toll on supply down the road, thus creating price pressures in the medium term. Due to subdued prices, domestic producers may opt not to plant rice paddies in the next harvest cycle while importers will unlikely buy rice abroad with global rice prices higher than the set cap,” Dacanay warned.
He said the price of rice could spike back to P53 per kilo once the ceiling is lifted, pushing headline inflation higher by 0.20 percentage point.
“The potential jump in rise prices will be a supply-side shock, but a rate hike might be necessary to address any second-round effects while the hike would affirm the BSP’s commitment to price stability,” Dacanay said.
As inflation averaged 6.6 percent from January to August after last month’s spike, it has stayed above the BSP’s two to four percent target range for 17 consecutive months or since hitting 4.9 percent in April 2022.
HSBC believes the decision between hiking the policy rate or keeping it steady will depend on the extent to which the tariff rate on rice is reduced to 10 percent from 35 percent.
“We estimate that if the tariff rate is reduced from 35 percent to 10 percent or less, the price of rice will simply return back to its level in July, when India hasn’t restricted its exports of parboiled rice yet. This would negate the impact of the supply shock – thus, giving the BSP no urgent reason to hike,” he said.
The inflation downtrend and slower-than-expected gross domestic product growth of 4.3 percent in the second quarter from 6.4 percent in the first quarter allowed the BSP to extend its hawkish pause by keeping interest rates on hold in three rate-setting meetings in May, June and August.
It raised key policy rates by 425 basis points between May last year to March this year to tame inflation and stabilize the peso.
ANZ senior economist Betty Wang said in a separate report that the BSP is likely to keep interest rates on hold on Sept. 21 as it needs time to gauge the durability of shocks as well as the effect of the price cap on rice.
“However, it will continue to maintain its hawkish stand and stress its readiness to act if inflationary pressures intensify. The battle against inflation appears to be ongoing,” Wang said.
She also said the BSP is likely to keep the benchmark rate steady for the rest of the year and a rate cut is unlikely this year.