The central bank is likely to continue to hold its benchmark rate at 2% until the fourth quarter of this year and is expected to raise the benchmark by 50 basis points (bps) and another 100 bps in 2023, according to a UK bank.
Analysts at Standard Chartered Bank (Stanchart) said in a conversation with the press on Friday January 21 that the Bangko Sentral ng Pilipinas (BSP) could be persuaded to adjust the key rate sooner than October or November 2022 if the path of inflation does not slow as expected for this year. PASB expects the inflation rate, which was above the 2-4% target in 2021, to return to the target range for this year and in 2023.
Stanchart’s economist for Asia and the Philippines, Jonathan Koh, said BSP would raise rates with the recovery in GDP and projected improvements in employment figures as the country becomes more successful in coping with the COVID-19 pandemic.
Stanchart projects that in the fourth quarter of 2021, GDP may have increased by 6.5% due to increased mobility during the quarter, which would bring full-year growth to 7.1%, higher than previous forecasts of 5%. For this year, the British bank expects the local economy to grow by 7.5% and by 2023, 5.3%. They have revised their GDP forecast for 2022 upwards due to the strong recovery in the third quarter of 2021.
For inflation, the bank’s economists forecast a 3% lower rate for this year, compared to 4.3% in 2021 and 2.9% for 2023. For the exchange rate, they predict a weaker peso of 52 .50 pula by the end of 2022.
ASA FX Research Stanchart head Divya Devesh said the peso against the US dollar will likely close at P52.50 by the end of 2022 due to the current account deficit. By 2023, the peso could maintain its level at 52.70 pesos.
“A critical factor is our and BSP’s expectations that the Philippines’ current account deficit will widen this year and that’s a headwind for the peso,” Devesh said. What is driving this is the higher commodity prices since the Philippines is a commodity importer.
Ultimately, markets expect BSP to remain dovish for most of 2022.
The BSP will hold “at least in the first half of this year and with a negative real policy rate it will continue to support growth in 2022,” Koh said. As for his estimate of a 50 basis point increase for the last quarter of this year, he said that “the real reason is that BSP cut its policy rates by 200 basis points (in 2020), which means that its current policy rate is very accommodative, so normalization (will happen).”
Ko said the reserve requirement ratio (RRR), which the BSP also suspended for 2021, may still be unchanged this year. However, the central bank could decide to cut the ratios if credit growth picks up. “But at the moment, the liquidity is quite abundant and there is always the tendency to ease the RRR, as it has been mentioned (by the governor of the BSP) also on several occasions,” he added.
Devesh said that relative to market expectations, Stanchart is generally negative on the dollar and that the major currency could end up “weaker this year (because) the Fed itself is going to be more dovish than the markets wait”.
Stanchart believes the US Federal Reserve will only hike rates twice this year compared to market expectations of four hikes. Devesh said that since the US Fed may not deliver the hikes as expected, this will be a price risk for the dollar. Additionally, the European Central Bank may raise rates at the end of 2023, which will be positive for the Euro but negative for the US Dollar.
“COVID has been a big support for the US dollar in terms of making the market risk averse and holding onto more dollars than needed. As COVID fears fade, I think markets will be more inclined to sell the US dollar that markets were holding,” Devesh said.
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