MANILA – Pressures from the looming United States (US) rate tightening and the elevated inflation rate made Fitch Solutions revise its Bangko Sentral ng Pilipinas (BSP) rate hike forecasts from 50 basis points to 75 basis points for 2022.
In a report, the country risk and industry research subsidiary of Fitch Group now sees the first BSP rate adjustment as early as the second quarter of next year from an earlier projection of late 2022.
“We at Fitch Solutions maintain our expectation for the Bangko Sentral ng Pilipinas (BSP) to keep its key policy rate on hold at 2.00 percent through 2021 but we now expect 75 basis points (bps) of hikes in 2022 to 2.75 percent, revised up from 50 bps previously,” it said.
To date, the BSP’s overnight reverse repurchase (RRP) rate is at a record-low 2 percent, the overnight lending rate is at 2.5 percent, and the overnight deposit rate is 1.5 percent.
These were slashed off by 200 basis points last year as the central bank bids to help lift the domestic economy from the impact of the pandemic by encouraging lending activities.
The report attributed the more hawkish rate move for the BSP to pressures from the same stance by the Fed, which is projected to start increasing its own rates next year.
It said any change in the Fed’s key rates would result in the tightening of US dollar liquidity conditions which is expected to add pressures on currencies of emerging markets (EM) that have yet to start their own rate hikes.
As the domestic economy starts to recover from the pandemic, the central bank “will seek to normalize sooner rather than later to anchor investor appetite for Philippine assets and temper demand-side inflationary pressures”, it added.
“We believe the BSP will take a somewhat more gradual approach but note that risks are to the upside, particularly if a ‘taper tantrum’ scenario was to occur over the coming months,” the report said.
The elevated inflation rate is also a factor for the BSP rate projection.
Last August, the domestic inflation rate rose to 4.9 percent, its fastest since January 2019.
The average inflation rate in the first eight months this year stood at 4.4 percent, above the government’s 2 percent to 4-percent target band.
“While we maintain our view that the BSP will look past elevated headline inflation readings in the near term and the shift towards monetary policy tightening by the US Federal Reserve (Fed), we flag the BSP could begin to normalize its monetary policy as early as Q222 (second quarter 2022),” it said.
Fitch Solutions increased its average inflation forecasts for the Philippines for this and next year to 4.5 percent and 3.7 percent, respectively.
These were previously at 4 percent for 2021 and 3.4 percent for 2022.
It said supply-side factors caused by the African swine fever, weather-related factors, and pandemic-related disruptions, among others, have resulted in a faster inflation rate in the country.
“As domestic demand begins to pick up, we see demand-side price pressures strengthening in 2022,” it added. (PNA)
