Fitch Solutions, a unit of the Fitch Group, said Monday it expects the Bangko Sentral ng Pilipinas to raise the policy rate by another 100 basis points this year to 4.25 percent to control the rising inflation.
Fitch Solutions said in a report that inflation in the Philippines would likely average 5.6 percent in 2022, higher than its previous forecast of 5.1 percent, given the elevated consumer price index in the last few months.
“Consumer price inflation has stayed well above the 4.0 percent ceiling of the BSP’s inflation target range since March 2022, most recently jumping from 5.4 percent in May to 6.1 percent in June, the highest in more than three years,” it said.
“Accordingly, we have raised our 2022 average inflation forecast to 5.6 percent in 2022, up from 5.1 percent previously. Elevated inflation will likely pave the way for further rate hikes, and we now expect the BSP to hike by a further 100bps over the coming months, which will take the policy rate to 4.25 percent by end-2022,” it said.
Fitch Solutions said it expects oil prices to remain above the pre-pandemic levels in the near term, and this would be a significant source of upward price pressure in the Philippines.
It said the ongoing lockdowns in China could exacerbate ongoing global supply chain disruptions, further adding to upside inflation risks.
An aggressive tightening cycle in the US will put further pressure on the BSP to hike aggressively, in order to preserve financial and currency stability, it said.
“The US Federal Reserve’s sharp hawkish shift over the past few months has caused the peso to depreciate sharply against the dollar, by around 7.0 percent so far this year. Downside pressure is likely to mount further as the US Federal Reserve now looks poised to raise interest rates by 75 to 100bps at their June meeting,” it said.
The Bangko Sentral ng Pilipinas surprised the market Thursday by raising the benchmark policy interest rate by 75 basis points to 3.25 percent, to rein in inflation and support the peso from further decline.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said that further local policy rate hikes would still be possible, if needed, as a function of any further Fed rate hikes to bring down the elevated inflation.
“Any further local policy rate hikes would also be a function of how the peso exchange rate behaves,” Ricafort said.
He said the higher local policy rates would increase the borrowing costs/financing costs of consumers, businesses, government and other institutions.
ING Bank Manila senior economist Nicholas Mapa said the two surprises on Thursday was that the rate hike was more forceful than previously projected (50 bps) and that it was delivered a good five weeks ahead of schedule.
Mapa said with inflation expected to sustain its ascent, the BSP might be busy at the next few policy meetings as well. “BSP Governor Medalla will need to sustain the recent hawkish rhetoric to re-anchor inflation expectations and establish commitment to fighting inflation,” he said.
Mapa said the BSP was expected to hike the rate at least one more time in the third quarter with the possibility of further tightening if inflation continued to remain stubbornly high.
“PHP will get an immediate reprieve in the short term but chronic trade deficits could mean that any PHP rally may be capped,” Mapa said.
Inflation in June accelerated to a 43-month high of 6.1 percent from 3.7 percent a year ago, driven by higher prices of food, non-alcoholic beverages and transport fares, the Philippine Statistics Authority said.