THE CENTRAL BANK may push for rate hikes sooner next year if inflation remains elevated, Moody’s Analytics said.

At the same time, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said while there are signs of a gradual rebound, the vaccine rollout and the healthcare system’s capacity are crucial to sustaining the growth momentum.

“The challenges of the pandemic may stay with us for a while, but we are hopeful that we will get back to where we were before the pandemic by the second half of next year,” Mr. Diokno said in an online speech on Tuesday.

The central bank kept the key policy rate steady at a record low of 2% last week to maintain support for economic recovery, saying that the elevated inflation in recent months is mainly due to low supply.

Officials said inflation is expected to return within the 2-4% target by 2022 and 2023.

Moody’s Analytics economists Katrina Ell and Dave Chia said the baseline expectation is for a rate hike by late 2022, although it warned policy tightening could happen sooner if inflation remains elevated.

“Ideally, monetary policy would remain on hold and firmly accommodative until late next year to support the recovery, but the BSP may be forced to act earlier if inflation does not cool,” the Moody’s economists said.

Inflation in August reached 4.9%, the highest since the 5.1% in 2018 as food prices spiked due to recent typhoons. This brought inflation year to date to 4.4%.

The BSP last week further raised its inflation forecast for 2021 to 4.4%, from 4.1% previously. By 2022 and 2023, inflation is expected to return within target at 3.3% and 3.2%, although also higher than the 3.1% forecast earlier given for both years.

Moody’s Analytics noted that there was a precedent incident of the BSP “tightening interest rates when inflation accelerates beyond comfort levels.” It cited the rate hikes in late 2018 when inflation reached multi-year highs.

To recall, the BSP during that year raised interest rates by 175 basis points in a bid to soothe inflation caused by higher food prices.

Amid the prolonged pandemic, Mr. Diokno has constantly assured that the accommodative policy will be kept for as long as necessary, given the economy’s recovery remains fragile amid the risks from the Delta-driven coronavirus surge.

In its note, Moody’s Analytics also noted that the Philippines continues to see sluggish domestic demand, citing the relatively “more subdued” core inflation of 3.3% in August, although still faster than the 2.9% in July.

“Output remains approximately 9% below pre-pandemic levels and is not forecast to surpass pre-pandemic levels until late 2022, ranking the Philippines the last country in the Asia-Pacific region to recover lost ground,” the economists added.

Meanwhile, Moody’s Analytics said the Philippines appears to be “less vulnerable” compared with emerging markets in case of another “taper tantrum” once the US Federal Reserve normalizes its policy settings through reduction in asset purchases and rate hikes.

“While inflation is elevated and the economy is carrying a decent negative output gap, the economy is generally seen as less vulnerable. It helps that the Philippines hasn’t been a recipient of hefty foreign inflows,” it said. — Luz Wendy T. Noble