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Tighter BSP policy seen by next year
The research arm of the Fitch Group said the Monetary Board is likely to jack up interest rates by 50 basis points next year as the economy strengthens.
Michael Varcas

Tighter BSP policy seen by next year

Lawrence Agcaoili (The Philippine Star) - June 19, 2021 - 12:00am

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may reverse to a tightening cycle next year as the country recovers from the pandemic-induced recession, which may result in the modest weakening of the peso against the dollar, according to Fitch Solutions Country Risk & Industry Research.

The research arm of the Fitch Group said the Monetary Board is likely to jack up interest rates by 50 basis points next year as the economy strengthens.

The BSP emerged as one of the most aggressive central banks in the world after it slashed interest rates by 200 basis points, bringing the benchmark rate to an all-time low of two percent.

Fitch Solutions expects foreign investments to pick up as the Philippine economy gathers strength and with the passage of Republic Act 11534 or the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Act.

Fitch Solutions said the BSP may keep its key policy rate on hold as inflation is seen cooling over the next few months after averaging 4.4 percent from January to May this year, above the central bank’s two to four percent target.

“As such, the real policy rate will remain negative over the coming months, albeit improving from 2.5 percent as of May. Central banks in other emerging markets (such as Russia and Brazil for instance) have begun hiking cycles despite pandemic headwinds, and we note market fluctuations around US Fed policy meetings could also add to depreciatory pressures on the peso,” it said.

Fitch Solutions expects the peso to average 48.10 to $1 this year and 49 to $1 next year amid the pandemic.

“COVID-19 pressures will keep the peso trading broadly sideways within a narrow range. With the Philippines lagging in regard to vaccinations and still recording around 6,500 cases daily, the potential for further domestic outbreaks remains high,” Fitch Solutions said.

Despite imposing the longest and strictest lockdown in the world, COVID-19 infections in the country breached the 1.3 million level with more than 23,000 deaths.

As of June 8, the Philippines has fully vaccinated only 1.6 percent of the population.

“As such, we do not expect flows from foreign investors to return in the near term. From a technical perspective, the peso looks to be testing resistance at 47.50 to $1, but we expect this uncertainty to ultimately keep the peso from making any major gains with its trading around 48 to $1,” it said.

Fitch Solutions sees the import cover from the country’s gross international reserves thinning to 10.6 months this year and to 8.7 months next year from 12.1 months in 2020, still above the three months minimum recommended by the International Monetary Fund.

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