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Philippines: BSP may raise interest rates by 75 bps next year
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may turn hawkish next year with a rate hike of 75 basis points as the Philippines continues to gradually recover from the pandemic-induced recession, according to Fitch Solutions Country Risk & Industry Research.
In a commentary titled “Philippines to Begin Hiking its Policy Rates in 2022,” Fitch Solutions said the BSP is likely to take a gradual approach to monetary policy normalization.
“We at Fitch Solutions forecast the BSP to begin its hiking cycle in 2022, forecasting the policy rate to rise from two percent as of end-2021 to 2.75 percent by end-2022,” it said.
As part of its COVID response measures, the BSP emerged as one of the most aggressive central banks in 2020, delivering a total of 200-basis-point cuts in interest rates.
The action, aimed at encouraging lending to boost economic activities during the pandemic, brought the benchmark overnight reverse repurchase rate to an all-time low of two percent.
“Indeed, despite financial market’s becoming increasingly hawkish over the Philippines’ monetary policy tightening cycle, expectations are for hiking to begin in 2022,” Fitch Solutions said.
The BSP has kept policy rates at record lows for eight consecutive rate setting meetings, leaving interest rates untouched last Nov. 18. It last tweaked interest rates in November last year when it delivered a surprise 25-basis-point cut.
“Nevertheless, the decision leaves the real policy rate deeply negative, at -2.6 percent, and against the backdrop of policy rate hikes in other emerging markets, likely monetary tightening by the major global central banks (namely the US Fed) and a stronger dollar, the BSP’s accommodative stance could weigh on the Philippine peso,” Fitch Solutions said.
Inflation averaged 4.5 percent from January to September as monthly inflation continued to exceed the BSP’s two to four percent target since January due to supply side shocks, including weather-related disturbances and African swine fever outbreak as well as rising global oil prices.
The Monetary Board slightly lowered the projected inflation this year to 4.3 percent, but retained the forecast for 2022 and 2023 at 3.3 percent and 3.2 percent, respectively.
The research arm of the Fitch Group sees inflation averaging 3.7 percent through 2022.
“For now, we expect the BSP to look past elevated inflation and to the economic recovery. Indications of an economic recovery are growing, with mobility data and the Purchasing Managers’ Index showing an expansion in activity in October,” it said.
Fitch Solutions expects bank lending to pick up until next year after slumping for eight straight months or until July before recovering in August and September.
“In addition, we expect credit demand to pick up heading into 2022, reducing the need for the unprecedented monetary accommodation from the BSP,” it said.
According to Fitch Solutions, the rebound in credit growth and economic normalization should boost demand-side inflationary pressures, resulting in a more aggressive monetary tightening cycle from the BSP.
Source: https://www.philstar.com/business/2021/11/23/2143115/bsp-may-raise-interest-rates-75-bps-next-year