RCBC chief economist Michael Ricafort (File photo)

MANILA – An economist is open to another off-cycle rate increase from the Bangko Sentral ng Pilipinas (BSP) as the United States' August 2022 inflation surpassed expectations despite a deceleration to 8.3 percent.

The US consumer price index (CPI) slowed from 8.5 percent to 8.3 percent last August, but projections are for its to be only around 8.1 percent given the decline in global oil prices.

Because of the higher-than-expected CPI in the world’s largest economy, analysts expect the Federal Reserve to continue its aggressive policy rate normalization, a change from some earlier forecasts that the central bank may slow down a bit on its rate hike moves.

The Fed’s rate decisions are affecting the Philippine peso’s performance, given its impact on the US dollar, thus, Philippine monetary authorities announced an off-cycle rate increase of 75 basis points last July as global inflation continues to rise.

“Another off-cycle BSP rate hike is possible especially if the peso exchange rate would remain weak and could threaten to post new record levels (after posting an intraday record 57.33 on September 7, 2022),” Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said.

On Thursday, the peso closed sideways against the greenback at 57.16.

BSP’s key policy rates have been increased by 175 basis points since last May, bringing the overnight reverse repurchase (RRP) rate to 3.75 percent.

Economists expect the BSP to further hike its key rates to address interest rate differentials with the Fed, which has increased the Fed Funds Rate by a total of 225 basis points to between 2.25-2.50 percent.

The BSP has been raising its key rates to help address the elevated domestic inflation rate, which ended its five-month rise last August when it slowed to 6.3 percent from 6.4 percent in the previous month.

The rate of price increases in the Philippines surpassed the government’s 2 to 4 percent target band last April when it jumped to 4.9 percent from 4 percent last March due to upticks in oil prices.

Average inflation in the first eight months this year stood at 4.9 percent and monetary authorities forecast inflation to continue its jumps until the last quarter of this year.

Ricafort projects domestic inflation to peak “around October 2022 at around 7 percent and could mathematically ease thereafter.”

“Thus, further local policy rate hikes could still be possible for the coming months, as supported by generally strong economic data; also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate, going forward,” he said.

He said the hikes in the BSP’s key rates “could be again a pre-emptive move” vis-à-vis the expectations for another 50 to 75 basis points increase in the Fed’s key rates to between 3-3.25 percent during the Federal Open Market Committee (FOMC) rate-setting meeting on Sept. 21.

He said another increase in the Fed’s key rates “would make the interest rate differential in favor of the US dollar and would already make the current 3.75 percent local policy rate unusually close to the Fed Funds Rate by then.”

He said “there was never an instance wherein the local policy rate is lower than the Fed Funds Rate” for “at least over the past 20 years or even before that.”

“Thus, for the coming months, more local policy rate hikes are still possible, if needed, as a function of any further Fed rate hikes in the quest to bring down elevated US inflation/CPI,” he said, adding that “any further local policy rate hikes would also be partly a function of how the peso exchange rate behaves and the impact on actual inflation data as well as inflation expectations, going forward.” (PNA)