Philippines: BSP seen raising rates until next year

MANILA, Philippines — The tightening cycle of the Bangko Sentral ng Pilipinas (BSP) may extend up to next year as inflation remained above the government’s two to four percent target, according to Fitch Solutions Country Risk & Industry Research.

In a report, Fitch Solutions said the BSP was likely to increase its key policy rates by 50 basis points in December and another 25 basis points next year.

The BSP has raised interest rates by 300 basis points this year, bringing the benchmark interest rate to a 14-year high of five percent from an all-time low of two percent.

Just last Thursday, the central bank delivered an aggressive 75-basis-point rate increase as it committed to match the rate hikes of the US Federal Reserve point by point to maintain a healthy 100 basis points interest rate differential.

“We now expect the benchmark policy rate to be hiked further to 5.50 percent in 2022 before peaking at 5.75 percent in 2023.The central bank will remain resolute in reining in high domestic inflation,” Fitch Solutions said.

According to Fitch Solutions, a stabilization in global monetary conditions and headwinds to economic growth are likely to cause the pace of hikes to slow.

“As such, we expect that the BSP will deliver a smaller 50-basis-point hike at its final meeting of the year in December, before raising rates further to a peak of 5.75 percent in the first half of 2023. Our forecasts are in line with consensus in 2022, but a bit higher than the 5.50 percent in 2023,” it said.

The research arm of the Fitch Group sees inflation averaging 5.8 percent this year before moderating slightly to 4.8 percent next year, both above the BSP’s two to four percent target range.

Inflation averaged 5.4 percent in the first 10 months after accelerating to a 14-year high of 7.7 percent in October.

“Inflation will remain above the four percent ceiling of the BSP’s target throughout the first half of 2023, which will pave the way for further rate hikes,” it said.

It pointed out that adverse weather conditions have led to disruptions in food supply this year and remains a threat to prices.

“Meanwhile, factoring in second-round effects from the surge in global commodity prices in 2022, we expect that headline inflation will only drop back below the four percent ceiling of the BSP’s target in the second half of 2023,” Fitch Solutions said.

The BSP now sees inflation averaging 5.8 percent this year, 4.3 percent next year, and 3.1 three percent for 2024.

“That said, we believe that the BSP will dial back on the pace of tightening going forward. According to the BSP, the latest sharp increase in policy rates was in part aimed at insulating the economy from external headwinds and exchange rate fluctuations,” it said.

After hitting an all-time low of 59 to $1, the peso has bounced back to the 57 level after the series of rate hikes and active intervention in the foreign exchange market.

The research arm sees the country’s gross domestic product (GDP) slowing down to 5.9 percent next year after accelerating to 7.4 percent this year from 5.7 percent in 2021.

“Moreover, headwinds to economic growth are mounting. While the third quarter growth outturn showed the economy expanding by a strong 7.4 percent year-on-year underlying signs of weakness are apparent in the breakdown,” it said.

Furthermore, Fitch Solutions said the lagged impact of persistent inflation, weaker external demand, and high interest rates would lead to a slowdown in growth.