‘Inflation pressures leave BSP no choice’

INTERNATIONAL think tank Fitch Solutions said the Bangko Sentral ng Pilipinas (BSP) will have no choice but start signaling tighter rates later this year due to inflationary pressures.

In its research note published on Monday, Fitch Solutions—the research arm of the Fitch Group —said they maintain the forecast for the BSP to hike its policy rate by 75 basis points to 2.75 percent by end-2022.

Fitch Solutions expects a combination of rising inflationary pressures, continued economic recovery, and rising interest rates around the world to prompt the BSP to tighten its monetary policy over the coming months.

Just last week, the BSP moved to maintain all monetary policy levers but said its annual inflation forecasts now exceeds the ceiling of its 2 to 4 percent target range at 4.3 percent.

“Should the BSP stand pat as the rest of the central banks tighten monetary policy, a narrowing of real interest rate differentials could lead to hot money outflows and downside volatility for the peso, particularly given weakening risk sentiment globally,” Fitch Solutions said.

The global think tank said the ongoing economic recovery will likely provide the BSP with more room to normalize its monetary policy over the coming months.

Fitch Solutions also revised their average 2022 inflation forecast for the Philippines up to 4.5 percent, from 3.7 percent previously. This is slightly higher than the BSP’s revised average 2022 inflation forecast.

“We expect the disinflationary pattern to reverse quickly over the coming months as commodity prices have surged following the Russia-Ukraine war and deeper disruptions to global supply chains due to China’s zero-covid policy have pushed up logistics cost,” Fitch Solutions said.

“According to Bloomberg, congestion in the key Chinese ports of Shenzhen and Hong Kong has risen to the highest level in five months due to Covid-19 lockdowns, while the queue of ships is also growing at Shanghai. Furthermore, a release of pent-up demand in the Philippines following continued easing of Covid-19 restrictions and still-negative real interest rates will also feed into higher price pressures over the coming quarters,” it added.

The BSP is expected to hold its next monetary policy meeting on May 19.

Image credits: Nonie Reyes ad Roy Domingo

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