THE BANGKO Sentral ng Pilipinas (BSP) may have to confront risks caused by interest rate differentials if it remains accommodative while major central banks are already tightening monetary policy, according to Fitch Solutions Country Risk & Industry Research.
“Should the BSP stand pat as the rest of the central banks tighten monetary policy, a narrowing of real interest rate differentials could lead to hot money outflows and downside volatility for the peso, particularly given weakening risk sentiment globally,” it said in a note on Monday.
Fitch Solutions said the Philippine peso has already weakened by around 2.4% against the US dollar since the start of the year. It expects the peso to continue to weaken due to a likely current account deficit amid the rise in capital imports and commodity prices.
The research firm said it expects the BSP to increase interest rates by 75 basis points by the end of 2022.
The US Federal Reserve and the Bank of England have started raising interest rates to tame high inflation.
The Monetary Board on Thursday maintained the key policy rates at record lows amid risks that cloud the economic recovery outlook. The central bank raised inflation projections due to the supply shock caused by the Russia-Ukraine war.
BSP Governor Benjamin E. Diokno said they do not necessarily have to move in lockstep with the Fed, noting they only consider global developments to the extent they affect the growth and inflation outlook.
He said the local economy can deal with the market volatility caused by monetary policy tightening through its flexible exchange rate system and strong external buffers.
Still, Fitch Solutions said the buildup in inflation pressures could prompt the BSP to tighten monetary policy over the coming months.
Aside from the war in Ukraine, the research firm said the disruption in global supply chains due to the increasing coronavirus cases in Chinese ports like Hong Kong and Shenzhen are factors that could cause a faster increase in commodity prices over the next months.
It said it now expects inflation this year to reach 4.5% from 3.7% previously. This is beyond the 2-4% target and BSP’s 4.3% outlook.
Headline inflation was stable at 3% in the first two months of the year.
March inflation data, which will likely reflect the impact of the war in Ukraine on oil and commodity prices, will be released on April 5.
Against the backdrop of inflation risks, Fitch Solutions said a stronger economic recovery should strengthen the case for the BSP to start unwinding its accommodative policy. It maintained its growth projection for the year at 6.5%, which is below the 7-9% target of the government.
“Although downside risks are rising due to rising geopolitical tensions in Europe and resurgence of coronavirus disease 2019 (COVID-19) waves in some countries, we believe the recovery remains largely on track with the continued easing of remaining mobility and border restrictions,” it said.
To ensure a more sustainable recovery, Mr. Diokno has said they would remain patient and wait until the second half of the year before assessing the need for a rate hike.
The BSP’s next policy review is scheduled on May 19. — Luz Wendy T. Noble