Fitch Solutions, a unit of Fitch Group, said Monday it expects the Bangko Sentral ng Pilipinas to increase the policy rate by 75 basis points to 2.75 percent in 2022, on rising inflationary pressures, gradual recovery in domestic activity and expected monetary policy tightening by the US Federal Reserve.
The 75-bps hike in policy rate was an upward revision from its previous estimate of a 50-bps increase in 2022. Fitch Solutions said the increase might happen after the BSP possibly maintained the policy rate at a record-low of 2 percent for the rest of 2021.
“We at Fitch Solutions maintain our expectation for the Bangko Sentral Ng Pilipinas to keep its key policy rate on hold at 2.0 percent through 2021, but we now expect 75 basis points of hikes in 2022 to 2.75 percent, revised up from 50 bps previously,” Fitch Solutions said.
“External pressures from the US Fed, a gradual recovery in domestic activity and still elevated inflationary pressures will spur the BSP to begin tightening as early as Q222 [revised from Q422],” it said.
Fitch Solutions said inflation was expected to averaged 4.5 percent in 2021 and 3.7 percent in 2022, revised upward revision from 4.0 percent and 3.4 percent previously, owing to elevated food and energy prices and continued supply-side issues.
The BSP kept its key policy rate at a record low of 2 percent in the Sept. 23 policy meeting in support of the economy that is gradually recovering from the COVID-19 pandemic.
The Monetary Board noted upside inflationary pressures which would see inflation run at the upper bound of its 2 percent to 4 percent target range. Inflation in August accelerated to 4.9 percent from 4 percent in July.
“Our expectation for a more hawkish stance from the BSP comes as external monetary policy conditions continue to put pressure on the more dovish emerging market central banks,” Fitch Solutions said.
The US Fed signaled at its September policy meeting a slightly more hawkish tilt to its policy rate outlook, with over half the Federal Open Market Committee members projecting a hike in 2022.
Fitch Solutions said this, combined with a tapering of asset purchase program, should begin to tighten dollar liquidity conditions, adding pressure on emerging markets that have yet to begin their own monetary tightening cycles.
BSP Governor Benjamin Diokno said last week the Monetary Board was of the view that prevailing monetary policy settings remained appropriate given the manageable inflation environment and uncertain growth outlook.
He said together with appropriate fiscal and health interventions, keeping a steady hand on the BSP’s policy levers would allow the momentum of economic recovery to gain more traction by helping boost domestic demand and market confidence.