February 28, 2022 | 00:00
MANILA, Philippines — Pressure is mounting for the Bangko Sentral ng Pilipinas (BSP) to raise its key interest rates as escalating inflation looms following Russian military attacks on Ukraine, a senior official said. global think tank.
In its latest research report, Oxford Economics said most Asia-Pacific economies are likely to implement rate hikes this year as rising energy costs drive up inflation.
Oxford’s chief economist for Asia, Sian Fenner, predicts an average rate hike of 55 basis points this year alone for Asia-Pacific.
Despite this, most monetary policies in the region would remain supportive of growth, she said.
Fenner said the transition to policy normalization would begin in the second quarter, starting with Indonesia expected to raise rates by a total of 75 basis points.
“That said, in the current risk environment, there is a risk that Indonesia and other twin deficit countries – India and the Philippines – will be under pressure to raise rates more aggressively,” he said. she declared.
The so-called “double deficit” is already threatening the pace of recovery in the Philippines.
A twin or double deficit occurs when a country has both a current account deficit and a budget deficit, which means that imports exceed exports and the government spends more money than it takes in. win.
“We expect Malaysia and the Philippines to raise rates twice this year by 50 basis points from the third quarter,” Fenner said.
At its policy meeting two weeks ago, the BSP left its policy rate unchanged at a record high of 2%.
However, the central bank indicated that it would “continue to carefully develop its plans for the eventual normalization of its extraordinary liquidity measures when conditions warrant.”
Fenner argued that global monetary policy conditions are becoming less accommodative, with central banks growing concerned that high inflation may become more permanent.
Inflation fears are exacerbated by rising oil prices which are expected to rise above the $100 a barrel level through the second half of the year as the war between Russia and Ukraine escalates.
“Asia-Pacific is unlikely to be spared the Russian-Ukrainian crisis. Higher inflation will squeeze household incomes while foreign demand is likely to be weaker,” Fenner said.
The BSP expects full-year inflation to reach 3.7%, slightly above Oxford’s average inflation forecast for the region at 3.5%, due to rising oil and food prices.
“As economies turn to life with COVID-19, we expect some broadening of inflationary demand pressures,” Fenner said.
Nonetheless, inflation in Asia-Pacific will still be less under pressure than in the US, Europe and other emerging market regions.
In addition, Fenner stressed that Asia-Pacific central banks must strike a balance between ensuring price stability and reviving their economies which have been hit hard by the pandemic.
Still, she noted that the Philippines and most countries in the region would catch up in terms of growth this year thanks to higher immunization rates and stronger domestic demand.
“The gradual reopening of borders should also spur growth, especially among the economies most dependent on tourism. We expect improving macro fundamentals to encourage central banks to raise policy rates from historically low levels,” Fenner said.
“But with large negative output gaps, particularly in emerging Asia, we expect most to want to maintain a pro-growth stance,” she said.