Thailand
Philippines: More aggressive rate hikes seen
MANILA, Philippines — The research units of the Moody’s Group and Fitch Group see the need for more aggressive rate hikes from the Bangko Sentral ng Pilipinas (BSP) to anchor inflation expectations and temper the depreciation of the peso.
In its Asia-Pacific weekly highlights, Moody’s Analytics said the Monetary Board needs to aggressively tighten the Philippines’ monetary policy stance after delivering a back-to-back 25-basis-point rate hike in May and June.
The BSP started its interest rate liftoff after it delivered a 25-basis-point rate hike last May 19, the first in more than three years or since November 2018, followed by another 25 basis points on June 23 as it now expects inflation to breach the two to four percent target in 2022 and 2023.
“We believe that the central bank is more likely to go with a 50-basis-point rate hike come August than another 25-basis-point move,” Moody’s Analytics said.
The research arm of the Moody’s Group believes the moderate rate increase stands in contrast to a hawkish US Federal Reserve, which raised its key policy rates by 75 basis points on June 15, the biggest since 1994.
“Higher food prices, resulting from supply shortages, and high oil prices are leading import inflation. A prolonged buildup of supply-side pressure increases the risk of second-round effects,” Moody’s Analytics said.
The BSP now expects inflation to average five percent for this year and 4.2 percent in 2023, both exceeding the central bank’s two to four percent target. Inflation is expected to ease back to 3.3 percent in 2024.
“BSP, which said the chance of a third rate hike in August is 90 percent, upwardly revised its inflation forecast for 2022 and 2023. It does not expect inflation to return to its target range of two to four percent until 2024,” Moody’s Analytics said.
According to Moody’s Analytics, the peso plummeted to a 16-year low after the US Fed raised its policy rates, widening the yield differential between US treasuries and Philippine government bonds.
Moody’s Analytics warned that a bloated import bill and widening current account deficit in May would continue to put downward pressure on the local currency.
“Outflows of capital suggest investors lack patience with the BSP’s pace of monetary policy normalization relative to the Fed’s brisk clip,” Moody’s Analytics added.
In a separate commentary titled “Mounting Inflationary Pressure to Lead to Further Rate Hikes in the Philippines,” Fitch Solutions Country Risk and Industry Research said it is now expecting the overnight reverse repurchase rate to end at 3.25 percent instead of 2.75 percent this year.
“This comes after the BSP raised its policy rate by an additional 25 basis points to 2.50 percent at its monetary policy meeting on June 23. Over the coming months, mounting inflationary pressure and rising global interest rates will prompt the BSP to adopt a more hawkish stance in our view,” Fitch Solutions said.
The research unit of the Fitch Group said the Monetary Board has highlighted that it “is prepared to take necessary policy action to bring inflation towards a target-consistent path over the medium term and deliver on its primary mandate of price stability,” and that “upside risks continue to dominate the inflation outlook up to 2023.”
Source: https://www.philstar.com/business/2022/06/28/2191311/more-aggressive-rate-hikes-seen