INTERNATIONAL think tank Fitch Solutions retained its growth forecast of the Philippines despite new expectations of a more aggressive tightening cycle by the Bangko Sentral ng Pilipinas (BSP).
In a research note published on Monday, Fitch Solutions, the research arm of the Fitch Group, said they still expect the country to grow at 6.1 percent—unchanged from their previous forecast before the surprise aggressive cut by the BSP earlier this month.
“Our forecast is for GDP [gross domestic product] growth to come in at 6.1 percent in 2022, as a result of sustained normalization of economic activities after Covid-19 restrictions have been largely eased,” Fitch Solutions said.
“The Philippine economy’s resilience should provide the BSP with room to step up the pace of policy tightening…. Indeed, at 53.8, manufacturing PMI readings remain well above the 50 level and the number of daily flights are only 26 percent below 2019 levels, compared to 49 percent in late March,” it added.
The think tank, however, is now forecasting more rate hikes from the BSP due to the country’s high inflation rate.
“Elevated inflation will likely pave the way for further rate hikes, and we now expect the BSP to hike by a further 100 basis points over the coming months, which will take the policy rate to 4.25 percent by end-2022,” Fitch Solutions said.
Just last week, the BSP hiked its policy interest rate by 75 basis points to 3.2 percent at an unscheduled meeting. The latest decision was largely driven by concerns about a sharp rise in inflation and the movement of the local currency.
Fitch Solutions has also raised its forecast for inflation in the country, from 5.1 percent to 5.6 percent.
“Despite a recent decline, we expect oil prices to remain well above pre-pandemic levels in the near term and this will be a significant source of upward price pressure in the Philippines. Meanwhile, ongoing lockdowns in Mainland China could exacerbate ongoing global supply chain disruptions, further adding to upside inflation risks,” Fitch Solutions said.
Outside the country, the think tank said the aggressive tightening cycle in the US will put further pressure on the BSP to hike aggressively, in order to preserve financial and currency stability.
“The US Federal Reserve’s sharp hawkish shift over the past few months has caused the peso to depreciate sharply against the dollar, by around 7 percent so far this year,” Fitch Solutions said.
“Policy rate hikes by the BSP should help to offset the depreciatory impact of hot money outflows, by ensuring that real interest rate differentials do not shift too sharply in favor of the US,” the think tank added.
The BSP is scheduled to meet again for its monetary policy setting decision on August 18.
Image credits: Roy Domingo