Fitch Solutions, a unit of the Fitch Group, said Monday it expects the Bangko Sentral ng Pilipinas to further increase the policy interest rate to 4.50 percent this year from 3.75 percent to ease price pressures in the coming months.
“Following the Bangko Sentral Ng Pilipinas’ decision to raise its policy rate by 50 bps [basis points] to 3.75 percent on Aug. 18, we now expect the benchmark policy rate to be hiked further to 4.50 percent by end-2022 from 4.25 percent previously,” Fitch Solutions said in a report.
It said inflation would likely remain elevated relative to the BSP’s targeted range of 2 percent to 4 percent “and we expect the central bank to tighten policy rate further to rein in inflation.”
Fitch Solutions noted that the Philippine peso came under significant depreciatory pressure as a result of tightening credit conditions globally. “This will likely prompt the BSP to hike rates further in order to safeguard external stability,” Fitch Solutions said.
The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised for the fourth time this year the overnight borrowing rate by 50 basis points to 3.75 percent to tame the accelerating inflation.
This brought the total policy rate increase this year to 175 basis points. The BSP kept the policy rate at a record low of 2 percent for the entire 2021 to support the economy’s recovery from the pandemic.
BSP Governor and Monetary Board chairman Felipe Medalla said in an online briefing the interest rates on the overnight deposit and lending facilities were also raised to 3.25 percent and 4.25 percent, respectively.
“The BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2 percent to 4 percent target range at 5.4 percent,” Medalla said.
“While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects,” Medalla said.
He said upside risks also continued to dominate the inflation outlook up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar and pending petitions for transport fare increases.
Medalla said the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon.
He said the favorable growth outcome in the first half at 7.8 percent also gave the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds.