MOUNTING inflationary pressures will lead to more rate hikes from the Bangko Sentral ng Pilipinas (BSP), an international think tank said in its recent assessment piece on the Philippines’s monetary policy landscape.
In a research note, Fitch Solutions—the research arm of the Fitch Group—said they now expect the Central Bank to raise its rates to 3.25 percent for this year. This is a more aggressive monetary tightening path than their earlier forecast of 2.75 percent by the end of the year.
The BSP has already raised its monetary policy rates twice this year, both by 25 basis points each. This has effectively raised the Central Bank’s main interest rate to 2.5 percent.
“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. 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 risk continues to dominate the inflation outlook up to 2023,’” Fitch Solutions said.
“Moreover, the ongoing robust economic recovery as shown in first quarter 2022 GDP data will give the BSP more room to tighten its monetary policy stance,” it added.
In their latest meeting, the BSP revised their inflation forecast for 2022 to 5 percent from the earlier forecast of 4.6 percent in May.
The country’s inflation target for this year and next year is at 2 to 4 percent.
The BSP also announced that inflation will breach the target for 2023, and is expected to average at 4.3 percent for next year. This is an upward adjustment to their within-target forecast of 3.9 percent in May.
“Over the coming months, we expect inflation to remain elevated relative to historical levels owing to high energy and grains prices as well as a weaker Philippine peso exchange rate, which will drive up imported inflation. Furthermore, a release of pent-up demand in the Philippines following continued easing of Covid-19 restrictions and still-negative real interest rates will also feed into higher price pressures over the coming quarters,” Fitch Solutions said.
“Lastly, Mainland China’s zero-Covid policy has led to citywide lockdowns in key economic and manufacturing hubs, exacerbating strains to the global supply chain,” it added.
