BSP tightening seen to continue until next year
THE CENTRAL BANK is likely to continue its tightening cycle to tame inflation in the coming months, but it may deliver less aggressive rate hikes as the peso stabilizes against the dollar, Fitch Solutions Country Risk & Industry Research said.
Fitch Solutions said in a commentary dated Nov. 18 that they expect the benchmark policy rate to end at 5.5% this year and go up to a peak of 5.75% next year as the Bangko Sentral ng Pilipinas (BSP) continues its fight against inflation.
“The central bank will remain resolute in reining in high domestic inflation, which we expect to average 5.8% in 2022 before moderating slightly to 4.8% in 2023,” Fitch Solutions said, adding that inflation will likely remain above the BSP’s 2-4% target throughout the first half of 2023.
“Food inflation — which accelerated further to a four-year high of 9.4% y-o-y in October — will likely remain a significant source of upside risk. Adverse weather conditions have led to disruptions in food supply this year and remains a threat to prices,” it added.
Headline inflation quickened to 7.7% in October from 6.9%, marking the seventh straight month that inflation breached the BSP’s 2-4% target range. For the first 10 months, inflation averaged 5.4%, lower than the BSP’s revised 5.8% full-year forecast.
The BSP last week raised its key interest rate by 75 basis points (bps) to 5%, the highest in nearly 14 years. It has so far hiked rates by 300 bps since May to tame inflation.
“That said, a deteriorating economic outlook and an eventual stabilization in global monetary conditions mean the pace of hikes will slow over the coming months,” Fitch Solutions said.
It said it expects the central bank to deliver a smaller 50-bp rate hike on Dec. 15 and increase borrowing costs further to a peak of 5.75% in the first half of 2023.
“Since October, the peso has started to stabilize against the US dollar and is less overvalued on a real effective exchange rate basis. Moreover, we think that the US Federal Reserve will only raise interest rates by an additional 50 bps by end-2022 before keeping them steady throughout 2023,” it added.
“If we are right, then there will be less of a need for the BSP to lean towards aggressive rate hikes to defend the peso going forward. That said, we do see upside risks to our US interest rate forecasts,” it said. “Moreover, headwinds to economic growth are mounting. While the third-quarter growth outturn showed the economy expanding by a strong 7.4% year on year, underlying signs of weakness are apparent in the breakdown.”
The economy expanded by 7.6% in the third quarter, faster than the revised 7.5% in second quarter. Growth in the first three quarters of the year averaged 7.7%.
“Further ahead, we think that the lagged impact of persistent inflation, weaker external demand, and high interest rates will lead to a slowdown in growth, which we expect to slow from 7.4% in 2022 to 5.9% in 2023,” Fitch Solutions said.
The research firm noted there are risks to their policy rate forecast, skewed slightly to the upside.
“Indeed, larger-than-expected rate hikes by the US Fed could exacerbate downside volatility for the peso, prompting steeper interest rate hikes by the BSP to ensure currency stability,” Fitch Solutions said.
The US Federal Reserve has raised policy rates by 375 bps since March to curb inflation.
US inflation eased to 7.7% in October from the 8.2% print in September. While inflation is still elevated, this may prompt the Fed to consider slower monetary tightening. — K.B. Ta-asan