Philippines: More interest rate hikes projected

MANILA, Philippines — The research units of the Fitch and Moody’s groups expect the Bangko Sentral ng Pilipinas (BSP) to further raise interest rates this year to rein in inflation.

Fitch Solutions Country Risk & Industry Research said more rate hikes are in the cards for the Philippines as inflation is likely to remain elevated relative to the BSP’s two to four percent target range.

“We expect the central bank to tighten policy rate to rein in inflation. Following the BSP’s decision to raise its policy rate by 50 basis points to 3.75 percent on Aug. 18, we now expect the benchmark policy rate to be hiked further to 4.50 percent by end-2022 from 4.25 percent previously,” Fitch Solutions said in a commentary.

The Monetary Board has so far raised key policy rates by 175 basis points, bringing the benchmark rate to 3.75 percent from an all-time low of two percent.

This included the huge 75-basis-point hike during a surprise off-cycle rate-setting meeting last July 14.

“Looking ahead, a combination of strong economic growth and an elevated inflationary backdrop will prompt the BSP to remain hawkish in our view. 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 two to four percent over the horizon,” Fitch Solutions said.

The research arm of the Fitch Group sees inflation accelerating to 5.6 percent this year from 3.9 percent last year and exceeding the BSP’s target range throughout the rest of the year, paving the way for more rate hikes.

Inflation averaged 4.7 percent in the first seven months after accelerating to 6.4 percent in July from 6.1 percent in June due to the impact of supply disruptions and the Russia-Ukraine war.

Despite the rate hikes, Fitch Solutions believes the Philippine economy is resilient enough to absorb the ongoing tightening cycle as it recently upgraded its gross domestic product (GDP) growth forecast to 6.6 from 6.1 percent.

“While we expect growth will likely slow in the second half 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 percent recorded in 2021,” it said.

Furthermore, Fitch Solutions added that the BSP would further hike interest rates to safeguard exchange rate stability as tighter global monetary conditions would exert more depreciatory pressures on the peso.

On the other hand, Moody’s Analytics said the BSP’s aggressive rate hikes in recent months show a commitment to its price stability mandate as headline inflation edged higher in July.

Moody’s Analytics also pointed out that the depreciation of the peso against the dollar amid the hawkish US Federal Reserve has also fueled inflation.

“Strong economic growth in the first half of the year gives the BSP room to keep tightening monetary policy this year. But we expect smaller rate hikes than of late on account of inflation projections for 2023,” Moody’s Analytics said.

The BSP raised its inflation forecast to 5.4 percent for this year but lowered its projections to four 2 percent for 2023 and to 3.2 percent for 2024.

“With oil prices cooling, and inflation expected to hit its peak in 2022, the BSP lowered its 2023 and 2024 inflation forecasts,” Moody’s Analytics said.

Likewise, the country’s GDP grew by 7.8 percent in the first half despite the disappointing 7.4 percent expansion in the second quarter from the 8.2 percent recorded in the first quarter.

This is slightly above the lowered 6.5 to 7.5 percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC).