Fitch Solutions, a unit of the Fitch Group, said Monday it expects the Bangko Sentral ng Pilipinas to increase the policy rate by another 50 basis points to 5.50 percent before the year ends to rein in the elevated inflation rate.
Fitch Solutions said in a report the interest rate might reach a peak of 5.75 percent in 2023.
The Monetary Board on Thursday raised the benchmark policy rate by 75 basis points to 5 percent to control inflation and support the peso. The last time the policy interest rate reached 5 percent was in February 2009.
“With inflation set to induce further rate hikes over the coming months, we now forecast interest rates to rise to 5.50 percent by end-2022. We think that a stabilization in global monetary conditions and headwinds to economic growth are likely to cause the pace of hikes to slow,” Fitch Solutions said.
“As such, we expect that the BSP will deliver a smaller 50 bps hike at its final meeting of the year in December, before raising rates further to a peak of 5.75 percent in the first half of 2023. Our forecasts are in line with consensus in 2022, but a bit higher than the 5.50 percent in 2023,” it said.
Inflation in October accelerated to a 14-year high of 7.7 percent from 6.9 percent in September, driven by faster increases in the prices of food and non-alcoholic beverages. It was the highest figure since it hit 7.8 percent in December 2008 at the height of the global financial crisis.
This brought the average inflation in the first 10 months to 5.4 percent, above the target range of 2 percent to 4 percent set by the government.
Fitch Solutions said food inflation – which accelerated to a four-year high of 9.4 percent year-on-year in October – would likely remain a significant source of upside risk. It said adverse weather conditions had led to disruptions in food supply this year and remained a threat to prices.
“Meanwhile, factoring in second-round effects from the surge in global commodity prices in 2022, we expect that headline inflation will only drop back below the 4.0 percent ceiling of the BSP’s target in H223 [second half of 2023]. Our central forecasts are for inflation to average 5.8 percent in 2022 and 5.0 percent in 2023,” it said.
Fitch Solutions said headwinds to economic growth were mounting. It said while the third-quarter growth outturn showed the economy expanding by a strong 7.4 percent year-onyear, “underlying signs of weakness are apparent in the breakdown.”
“Moreover, high frequency data such as manufacturing PMI, industrial production and retail sales show that growth may have peaked already. Further ahead, we think that the lagged impact of persistent inflation, weaker external demand, and high interest rates will lead to a slowdown in growth, which we expect to slow from 7.4 percent in 2022 to 5.9 percent in 2023,” it said.
It said that larger-than-expected rate hikes by the US Fed could exacerbate downside volatility for the peso, prompting steeper interest rate hikes by the BSP to ensure currency stability.