The Bangko Sentral ng Pilipinas (BSP) is poised to raise interest rates by a further 25 basis points (bps) to 5% to tame rampant consumer prices, Deutsche Bank warned ahead of the monetary board meeting on August 27, Inquirer reports.

Asian policymakers are currently walking a tightrope between crushing sticky inflation and suffocating fragile domestic growth. For the Philippines, this impending rate increase is critical as expensive food and energy imports mercilessly hollow out the purchasing power of low-income citizens. The central bank must stabilise the local currency and protect real wages to prevent a total collapse in consumer spending.

Local media surveys back this hawkish view. A recent poll showed 11 out of 15 economists anticipate a quarter-point adjustment. If implemented, this monetary step pushes the total tightening cycle to 75bps since April.

The pressure is undeniably widespread across the domestic economy. Deutsche Bank data reveals that 80% of the consumer basket by weight still suffers from above-trend price jumps. “Spillover effects are likely still working their way through the economy,” said Deutsche Bank.

Headline inflation cooled to 6.2% in July, dropping from an April peak of 7.2%. However, this metric remains double the official 3% BSP target. Consequently, the local currency has severely weakened. The purchasing power of PHP1 ($0.02) from 2018 collapsed to just PHP0.74 by July. Analysts expect average inflation to hit 5.4% by year-end.

Aggressive monetary tightening is already choking domestic output. Second-quarter economic expansion crashed to 2.3%, the most sluggish non-pandemic growth recorded since late 2009. BSP Governor Eli Remolona Jr signalled a dovish pivot recently, suggesting authorities will soon scale back their aggressive stance to protect the wider economy.

Capital Economics echoed the 25bp hike forecast but suggested the current tightening cycle is rapidly approaching its conclusion. Provided global crude prices fall, monetary authorities will quickly pivot to bailing out the slowing economy. “Policymakers will opt for a further 25bp hike next week to add to the 50bp of tightening delivered so far in this cycle,” said Capital Economics.