Fitch Solutions, a unit of the Fitch Group, said Monday it expects the Bangko Sentral ng Pilipinas to increase the benchmark interest rate by another 75 basis points to 5 percent before the end of 2022 to manage the elevated inflation rate.
Fitch Solutions said in a report the country’s strong economic recovery would provide more room for the BSP to normalize its monetary policy.
“Following the Bangko Sentral ng Pilipinas’ decision to raise its policy rate by 50 bps to 4.25 percent on Sept. 22, we now expect the benchmark policy rate to be hiked further to 5.00 percent by end-2022 from 4.50 percent previously,” it said.
“Inflation is likely to remain elevated relative to the BSP’s target range of 2 percent to 4 percent and we expect the central bank to tighten monetary policy further to anchor inflation expectations,” it said.
The BSP already raised the policy rate by a total of 225 bps since the start of its hiking cycle in May.
Fitch Solutions said that over the coming months, the elevated inflationary backdrop and a continued hawkish US Fed would prompt the BSP to tighten its monetary policy setting further.
The BSP said last week it recognized the need for follow-through action to anchor inflation expectations and prevent further price pressures from becoming further entrenched.
“With the US Fed likely to hike interest rates by a further 75 bps, after delivering its third straight rate increase of 75 bps on Sept. 21, we at Fitch Solutions now expect the BSP to hike its policy rate to 5.00 percent by end-2022, up from our previous forecast of 4.50 percent,” it said.
Fitch Solutions said inflation was expected to average 5.6 percent in 2022, higher than the average of 5.0 percent from January to August. Latest data showed that inflation remained high in August although it slightly eased to 6.3 percent from a four-year high of 6.4 percent in July.
Upward price pressures came mainly from food and transport which saw an increase of 6.3 percent year-on-year and 14.6 percent year-on-year, respectively, in August.
Fitch Solutions raised its 2022 growth forecast for the Philippine economy to 6.6 percent from 6.1 percent previously, following the better-than-anticipated average of 7.8 percent in the first half.
“While we expect growth to likely slow in H222 [second half of 2022] due to an array of economic headwinds stemming from a softening global economic outlook, tightening monetary conditions and elevated energy prices, the 2022 economic performance would still be a substantial improvement over the 5.6 percent recorded in 2021,” it said.
The BSP earlier said the Philippine economy could “accommodate a tightening of monetary policy stance, as demand has generally held firm owing to improved employment outturns and ample liquidity and credit.”