THE BANGKO Sentral ng Pilipinas (BSP) is expected to remain hawkish for the rest of the year, bringing the policy rate to 4.5% by the end of the year, Fitch Solutions Country Risk & Research said.
“A combination of strong economic growth and an elevated inflationary backdrop will prompt the BSP to remain hawkish in our view,” Fitch Solutions said in an Aug. 19 note.
The BSP last week raised its benchmark policy rate by 50 basis points (bps), bringing it to 3.75%. Rates on the overnight deposit and lending facilities were also hiked by 50 bps to 3.25% and 4.25%, respectively.
“In the accompanying monetary policy statement, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and to bring inflation back to its target of 2%-4% over the horizon. As such, we at Fitch Solutions now expect the BSP to hike its policy rate to 4.5% by end-2022, up from our previous forecast of 4.25%,” the think tank said.
Fitch Solutions maintained its average inflation forecast for the Philippines at 5.6% for 2022, slightly above the BSP’s revised 5.4% average inflation forecast.
Headline inflation accelerated to 6.4% year on year in July, the fastest in nearly four years and exceeded the central bank’s 2-4% target band for a fourth straight month. Inflation averaged 4.7% in the first seven months.
Elevated inflation will pave the way for more rate hikes by the BSP, it added.
“Against the backdrop of the ongoing Russia-Ukraine war and adverse weather conditions in several food-producing countries in the region, energy and food prices will continue to be a significant source of upward price pressure in the Philippines,” Fitch Solutions said.
While oil prices have declined recently, the think tank said prices are still higher compared to the 2021 level.
“Our Oil & Gas team forecasts Brent crude oil to average $105 per barrel in 2022, compared to $70.95 per barrel in 2021,” it added.
The Philippine economy is expected to continue its recovery this year. Fitch Solutions earlier raised its gross domestic product (GDP) growth forecast for the Philippines to 6.6% from 6.1% previously.
“We believe that the Philippines’ economic resilience will also provide more room for the central bank to normalize its monetary policy,” it said.
“While we expect growth will likely slow in (second half of 2022) as a result of rising economic headwinds stemming from a softening global economic outlook, tightening monetary conditions, and elevated energy prices, the 2022 economic performance would still be stronger than the 5.6% recorded in 2021.”
The economy expanded by 7.4% in the second quarter, bringing first-half growth to 7.8%.
Tighter global monetary conditions in the coming months will likely exert more depreciatory pressures on the Philippine peso, Fitch Solutions said.
“The Philippine peso has come under significant depreciatory pressure as a result of tightening credit conditions globally. This will likely prompt the BSP to hike rates further in order to safeguard external stability,” it said.
The Philippine peso has depreciated by around 10% against the US dollar year to date.
The US Federal Reserve has hiked its fed fund rate by 225 bps since the start of the year to a target range of 2.25-2.50%. Fitch Solutions sees the Fed hiking by 75 bps more before yearend.
“If the BSP chooses to stand pat in subsequent meetings as the US Fed hikes, real interest rate differential could widen and trigger capital outflows, exacerbating downside volatility for the peso,” it added.
BSP Governor Felipe M. Medalla on Friday said they will respond to the US Federal Reserve’s policy tightening, but does not have to match the magnitude of its rate hikes.
“We will not match them (the Fed) point by point,” Mr. Medalla said, “If they do (raise rates by 75 basis points)… that needs a reaction.”
The Monetary Board is scheduled to meet on Sept. 22. — K.B.Ta-asan
