Two more 25-bp rate hikes seen this year

STILL BROADENING PRICE pressures despite slowing headline inflation may warrant two more consecutive rate hikes by the Bangko Sentral ng Pilipinas (BSP), Deutsche Bank Research said.

In a report dated July 10, the Germany-based think tank said it still sees the central bank delivering a 25-basis-point (bp) rate hike at each of its next two policy meetings on Aug. 27 and Oct. 22.

In June, headline inflation eased to a three-month low of 6.4%, while core inflation, which strips out volatile food and fuel prices, quickened for a sixth straight month to a near three-year high of 4.4%.

“Measures of underlying inflation show that the process of broadening price pressures is still underway,” Deutsche Bank Research economist Junjie Huang said in a separate report released on July 7. “Our monetary policy outlook remains unchanged as we expect this process to continue in the coming months.”

If his projections hold true, the BSP’s key policy rate will climb to 5.25% by October. This will be the highest in one-and-a-half years or since the 5.5% in April last year and also match the rate set in June 2025.

The Monetary Board began its tightening cycle with a quarter-point hike in April and later delivered another 25-bp increase in June due to increasing inflationary pressures from the energy shocks triggered by the Middle East war.

This has so far brought the benchmark rate to 4.75%, with monetary officials leaving the door open for further measured hikes.

BSP Governor Eli M. Remolona, Jr. has said that they still have space for a third straight 25-bp rate hike as he sees the economy gaining some momentum by the second half of the year.

The central bank has also reiterated its hawkish signals, noting that they could continue to pursue further monetary action to bring inflation back to their 3% target.   

Deutsche Bank now sees the headline print settling at 6% this year, slower than its previous 6.2% estimate. However, it left its inflation forecast for next year unchanged at 4.1%.

“While headline inflation has come down in the past two months, second-round effects are still working their way through the economy, in our view, as seen in the measures of underlying inflation,” Mr. Huang said.

He also flagged price risks from the looming El Niño event amid lingering pressures on food inflation, as well as from the peso’s fragile standing versus the dollar. 

“Moreover, we believe that the upside risk from El Niño and food price inflation has not been fully priced in, while USD (US dollar) strength or rates repricing could keep the peso and imported cost inflation under pressure,” he added.

The Philippines may encounter “strong” El Niño conditions by September to November, with a potentially stronger phenomenon to come between October and January next year, according to the state weather bureau.

If realized, the local agricultural sector will likely take a hit from extreme hot weather, which could push food prices up nationwide.

Also, the ongoing war between the US, Israel, and Iran continues to weigh on the peso, averaging above the P61-per-dollar mark for two straight months or since May.

WAGE HIKE IMPACT
In a separate commentary, Metropolitan Bank and Trust Co. (Metrobank) noted that the upcoming minimum wage hike could also add pressures to the country’s inflation, growth and employment.

Metrobank Research Officer Marian Monette Florendo-Obias said this record-high hike could stoke inflation via second-round effects as businesses may opt to increase their prices to meet the new minimum wage.

“Higher minimum wages raise labor costs for businesses, particularly for labor-intensive firms in the services sector. As wage expenses rise, profits may be squeezed and businesses may be forced to pass on part of the costs to consumers through higher prices,” she said.

“This will result in higher inflation for goods and services heavily dependent on labor inputs. It is then reasonable to expect upward pressure on overall inflation figures,” she added.

According to Ms. Florendo-Obias, rising prices could also dampen demand and lead to a slightly weaker job market as businesses cut workers’ hours or reduce hiring to offset increasing labor costs.

“Now this could have an overall negative impact on economic growth, with the government estimating that a P100 nationwide minimum wage increase could reduce GDP (gross domestic product) growth by around 0.4 percentage point,” she added.

Philippine GDP growth slumped to a post-pandemic low of 2.8% in the first quarter of the year.

However, all these spillover effects only pose minimal threat to the economy as the wage hike is set to affect merely 2% of the country’s labor force, Ms. Florendo-Obias noted.

“Inflation may rise; employment numbers may take a hit; and growth may slow down,” she said. “However, the overall impact on the broader economy is expected to remain manageable, particularly if accompanied by complementary government policies.”

The Department of Labor and Employment announced late last month that it will implement a dual tranche P85 increase in the minimum wage in the National Capital Region (NCR).

Starting July 25, the minimum wage in the NCR will increase by P60 to P755 for nonagricultural workers and to P718 for agricultural workers and employees of retail, service, and small manufacturing establishments.

The second tranche of the wage hike or P25 will take effect in January 2027. — Katherine K. Chan