Hike rates

High inflation could push the central bank to raise rates further

Fuel retailers will lower pump prices for petroleum products on Tuesday. — PHILIPPINE STAR/ WALTER BOLLOZOS

RISE IN INFLATION could prompt the Bangko Sentral ng Pilipinas (BSP) to consider more rate hikes this year, according to Fitch Solutions Country Risk & Research.

At the same time, the central bank should ensure that its efforts to tameflation will not harm the Philippines’ post-pandemic recovery, Moody’s Analytics said.

“The central bank should continue to tighten to contain inflation, which is likely to remain well above the BSP target range throughout 2022,” Fitch Solutions said in a July 15 report.

The think tank raised its average inflation forecast for the Philippines to 5.6% in 2022 from 5.1% previously. This is above the 5% average of the BSP inflation planned this year.

Inflation rose 6.1% year-on-year in June, the fastest in nearly four years and exceeded the central bank’s target range of 2-4% for a third consecutive month. the inflrationing rate averaged 4.4% Iffirst six months.

With inflation expected to remain elevated, Fitch Solutions said it now expects the BSP to hike rates another 100 basis points, bringing the benchmark rate to 4.25% by the end of 2022. .

The Bangko Sentral ng Pilipinas (BSP) unexpectedly tightened monetary policy by 75 basis points (bp) on July 14, taking the benchmark rate to 3.25%. Rates on deposit and overnight lending facilities were also raised by 75 basis points to 2.75% and 3.75%, respectively.

“In addition toflation, an aggressive tightening cycle in the United States will put additional pressure on the BSP to increase aggressively, in order to preserve financial and monetary stability,” said Fitch Solutions, adding that rate hikes would help to offset the depreciating impact of “hot money”floops.

The US Federal Reserve is expected to raise interest rates by 75 to 100 basis points at its July 26-27 meeting, afterflation climbed to 9.1% in June.

Meanwhile, Moody’s Analytics associate economist Sonia Zhu said he expected two more rounds of rate hikes this year, taking the benchmark rate above 4%.

“However, aggressively raising interest rates can be a double-edged sword. On the one hand, higher interest rates can slow the rebound in domestic demand and dampen inflation. On the other hand , higher rates risk a hard landing if policymakers overcompensate as households and businesses cut spending and investment,” Zhu said in a July 17 note.

“The BSP will have to strike a Ifdon’t swing, because he won’t want to stifle post-pandemic growth that seeks to containflation under control,” she added.

For Fitch Solutions, the “resilience” of the Philippine economy will give the BSP the space it needs to accelerate its policy tightening.

The think tank projects the Philippines’ gross domestic product (GDP) to grow by 6.1% this year, below the government’s target of 6.5-7.5%.

Moody’s Analytics, on the other hand, expects the Philippine economy to grow “below 7%” this year.

The Philippine Statistics Authority is expected to release in Julyflration data on August 5 and second quarter GDP data on August 9. – Keisha B. Ta-asan