Stubborn Philippine inflation fuels higher for longer rate bets

Philippine inflation at a fresh 14-year high has prompted bets that the central bank will extend its monetary tightening and hit a higher-than-initially expected peak policy rate. 

Bangko Sentral ng Pilipinas will raise borrowing costs by another 75 basis points in the coming meetings, according to a median forecast in the latest Bloomberg survey. That compares with a half-point estimate in a January survey.

All nine analysts polled after the January inflation data see the possibility of a higher BSP terminal rate. Of that, seven flagged a longer-than-expected tightening cycle, with some seeing an end to rate increases as late as June.

Policymakers will next set the overnight borrowing rate — currently at 5.5% — on Thursday and analysts are split between a half- and 25-basis-point increase.

Inflation at the highest level since 2008 puts in question BSP Governor Felipe Medalla’s remarks last month that an end to rate increases could come this quarter. Following the latest consumer-price data, Mr. Medalla said he can’t discount further price shocks. 

Analysts raised their forecasts on average price gains this year by full percentage point to 5.4%, with inflation seen staying above 8% in the first quarter, a separate Bloomberg survey showed.

The Philippines’ statistician said price risks have broadened. In India too, inflation flared up in January. In contrast, price gains are on a downtrend in Indonesia and Thailand.

BSP may also take its cue from the Federal Reserve where a possible re-acceleration in consumer price growth boosts bets for a higher rate path. “More comfortable interest-rate differentials” could help stabilize the peso and inflation, said Rizal Commercial Banking Corp.’s Michael Ricafort. 

More work is needed to cool prices, according to BSP, which has so far raised the rate by 350 basis points, among the most in the region. “Non-monetary measures are urgently needed,” said China Banking Corp.’s Domini Velaquez, who forecast a BSP terminal rate of 6%.

While full-year Philippine output growth hit its fastest since 1976 in 2022, challenges point to a slower expansion this year. Still, the nation is forecast to remain among Asia’s economic bright spots, giving room for BSP to sustain its most-aggressive monetary tightening in two decades, if needed. — Bloomberg