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Philippines: BSP seen hiking rates sooner, faster
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may hike interest rates as early as the second quarter due to accelerating inflation and mounting pressures from the hawkish stance of the US Federal Reserve, according to the research units of Fitch and Moody’s.
In a report, Fitch Solutions Country Risk & Industry Research said the BSP may hike interest rates by 75 basis points instead of 50 basis points next year.
“We at Fitch Solutions maintain our expectation for the BSP to keep its key policy rate on hold at two percent through 2021, but we now expect a 75-basis-point hike in 2022 to 2.75 percent, revised up from 50 basis points previously,” Fitch Solutions said.
Fitch Solutions also said the central bank could start its tightening cycle as early as the second quarter of 2022.
As part of its COVID response measures, the BSP slashed interest rates by 200 basis points, bringing the benchmark rate to an all-time low of two percent, and lowered the reserve requirement ratio (RRR) last year.
The central bank also extended P540 billion in provisional advances to the national government, remitted P35 billion worth of dividends to the national coffers, and purchased government securities in the secondary market as it continued to do the heavy lifting to keep the economy afloat amid the resurgence of COVID cases.
The BSP has kept interest rates steady for seven straight rate-setting meetings since the surprise 25-basis-point rate cut delivered in November last year.
“We expect that as the economy begins to rebound, the BSP will seek to normalize sooner rather than later to anchor investor appetite for Philippine assets and temper demand-side inflationary pressures,” Fitch Solutions said.
The economy rebounded with a strong gross domestic product (GDP) growth of 11.8 percent in the second quarter, ending the pandemic-induced quarters that stretched five quarters with a contraction of 3.9 percent.
Fitch Solutions raised its inflation forecast to 4.5 percent for this year and to 3.7 percent for next year due to elevated food and energy prices as well as continued supply-side issues.
According to Fitch Solutions, food prices have risen strongly on the back of the African swine fever (ASF) and poor weather conditions, while continued disruptions to supply chains caused by pandemic-related disruptions and production backlogs have contributed to upside price pressures through 2021.
“On the inflation front, continued supply-side disruptions and a pick-up in domestic demand could see inflation expectations begin to climb, requiring a sooner and more aggressive monetary tightening cycle from the BSP. In addition, a taper tantrum scenario could weigh on the peso and tighten dollar-liquidity conditions, such that the BSP opts to take a more hawkish approach to support the peso and anchor investor interest in Philippine assets,” Fitch Solutions said Moody’s Analytics said the BSP is not likely to raise interest rates until the second half of next year, but the central bank may be forced to act earlier if inflation does not cool.
“Output remains approximately nine percent below pre-pandemic levels and is not forecast to surpass pre-pandemic levels until late 2022, the last in the Asia Pacific region to do so. Ideally, monetary policy would remain on hold and firmly accommodative until late next year to support the recover,” Moody’s Analytics said.
Source: https://www.philstar.com/business/2021/09/28/2130126/bsp-seen-hiking-rates-sooner-faster