BofA sees BSP ending its tightening cycle in August

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely end its tightening cycle after delivering a third straight rate hike later this month, the Bank of America (BofA) Global Research said.

In a report on Tuesday, BofA economists said the BSP may raise its policy rate by 25 basis points (bps) at its Aug. 27 meeting if July inflation settled below 7%. This would bring the benchmark rate to 5%.

“We think a moderate inflation print (i.e. <7% year on year) may be enough for the Bangko Sentral to proceed with one more rate hike in August but signal that they may have already reached their target, having raised the policy rate 75 bp YTD (year-to-date) by then,” BofA Global Research said.

The BSP has so far raised its benchmark policy rate by 50 bps to 4.75% via two consecutive 25-bp hikes at its April and June meetings.

For BofA, inflation remaining above the BSP’s target would also warrant the final 25-bp hike it called for this month.

“The Philippines may require further tightening as inflation stays above target,” it said.

“Inflation expectations have eased from worst-case scenarios as oil prices subside, but rice and wage inflation remain key risks,” BofA added.

In June, headline inflation cooled for a second straight month to 6.4% from 6.8% in May, but marked the fourth month in a row that it breached the BSP’s 3% target.

The Philippine Statistics Authority is scheduled to release July inflation data on Wednesday (Aug. 5). Based on the median forecast of 21 economists and analysts polled by BusinessWorld last week, headline inflation will likely hold steady at 6.4% in July.

BofA currently estimates Philippine inflation to settle at 6.7% by yearend. If realized, this would be the fastest pace in three years or since the 7.2% in 2023. This is also faster than the central bank’s projected 6.4% average inflation for 2026.

At the same time, BofA’s latest projections show the National Government could miss its growth targets again over the next two years, with economic expansion seen at 2.5% for 2026 and 3.5% for 2027.

The Development Budget Coordination Committee (DBCC) is targeting 3.5%-4.5% GDP growth this year and 5%-6% next year.

According to BofA, the country’s economic figures in the second quarter are pointing to “mixed signals,” especially with higher government spending but lower revenue.

In the second quarter, government expenditure climbed by 6.5% to P1.684 trillion from the P1.582 trillion a year ago. Revenues dipped by 0.71% year on year to P1.253 trillion from P1.262 trillion.

TWO MORE HIKES?
Meanwhile, Japan-based MUFG Global Markets Research is pricing in two more 25-bp rate increases as the BSP holds to its hawkish stance, bringing the key policy rate to 5.25%.

After its meeting this month, the Monetary Board will hold two more policy reviews this year on Oct. 22 and Dec. 17.

Also, MUFG sees the peso recovering eventually to trade below the P61-a-dollar level at a gradual pace.

“With our expectation for BSP to remain hawkish and deliver two more 25 bps rate hikes over the coming meetings, coupled with our forecasts for some tentative improvement in government spending, we remain comfortable with our baseline view for USD/PHP to move lower as such,” it said in its monthly foreign exchange outlook published late on Monday.

However, the looming “super El Niño” event poses a significant risk to the peso’s projected rebound, MUFG added.

MUFG projects the local unit settling at P61.75 against the greenback in the third quarter, before strengthening further to P61.50 in the fourth quarter and P61 in the first quarter of 2027.

By the end of the second half of 2027, the peso will likely climb to P60.50.

As of end-July, the local unit averaged P60.2042 versus the greenback, about 5% or P2.85 weaker than its P57.12 average in the same period last year, BSP data showed.

It slumped to an all-time low of P61.847 per dollar on July 24, breaking its previous record-low finish of P61.75 on July 23, amid the renewed escalation of the Middle East war.

The DBCC forecasts the peso to range between P60 and P62 against the dollar this year until 2030. — Katherine K. Chan