Philippines: Rate hikes likely to continue

MANILA, Philippines — The research units of Fitch and Moody’s Groups sees the Bangko Sentral ng Pilipinas (BSP) delivering more rate hikes until December to tame inflation and stabilize the peso.

In a report, Fitch Solutions Country Risk & Industry Research said the BSP is expected to hike in tandem with the US Federal Reserve to safeguard external stability

“Over the coming months, we expect that the elevated inflationary backdrop and a continued hawkish US Fed will prompt the BSP to tighten its monetary policy setting further,” Fitch Solutions said.

With the US Fed likely to hike interest rates by a further 75 basis points after another jumbo 75-basis-point increase on Sept. 21, Fitch Solutions now expects the BSP to raise the benchmark interest rate to five percent instead of 4.50 percent by end-2022.

The BSP has so far raised interest rates by 225 basis points,  bringing the overnight reverse repurchase rate to 4.25 percent from an all-time low of two percent.

It sees inflation remaining elevated in the Philippines over the coming months, and average 5.6 percent as it breached the BSP target of two to four percent, averaging 4.9 percent between January and August.

“We expect the central bank to tighten monetary policy further to anchor inflation expectations,” it said.

Furthermore, it said the peso has also come under significant pressure as a result of tightening credit conditions globally.

“So far, the BSP has continued to lag behind the Fed’s tightening cycle, causing the peso to weaken substantially against the dollar,” Fitch Solutions said.

If the BSP chooses to stand pat in subsequent meetings as the US Fed continues to hike, Fitch Solutions warned that real interest rate differentials could widen in favor of the US and trigger capital outflows, exacerbating downside volatility for the peso.

The peso has depreciated by more than 14 percent to hit an all-time low of 58.50 to $1 last Friday from the end-2021 level of 50.999 to $1.

Fitch Solutions said the country’s strong economic recovery would provide more room for the BSP to normalize its monetary policy.