HSBC: Philippines seen raising interest rates by Q1 2022

MANILA, Philippines — British banking giant HSBC said the Philippines is likely to revert to a tightening cycle by hiking interest rates as early as the first quarter of next year as the country starts to recover from the pandemic-induced recession.

Fan Cheuk Wan, chief investment officer for Asia, private banking, and wealth management at HSBC, said the Bangko Sentral ng Pilipinas (BSP) is likely to keep interest rates on hold at record lows until the first rate hike by the first quarter of 2022.

“We think limited demand-side pressures will keep inflation relatively benign in the second half of the year. We expect the BSP will keep policy rate on hold at two percent until the first rate hike in the first quarter of 2022. The current historically low nominal and real interest rates should be accommodative enough to support the economic recovery,” Fan said.

The central bank’s Monetary Board is scheduled to hold a rate-setting meeting on Thursday.

Fan said the BSP is expected to stay cautious in normalizing monetary policy due to the lingering headwinds from the pandemic.

To cushion the impact of the global health crisis, the BSP slashed interest rates by 200 basis points last year, bringing the benchmark rate to an all-time low of two percent.

Fan said HSBC is expecting three rate hikes next year, bringing the overnight reverse repurchase rate to 2.75 percent by the end of next year.

“The market will expect the Philippines to be likely among the first Asian economy to start policy normalization and raising policy rates in the first half of next year,” Fan said.

The British banking giant sees the economy bouncing back with a gross domestic product (GDP) growth of 6.3 percent this year and 6.5 percent next year after a record 9.6 percent contraction last year.

“In the Philippines, the economy continues to face headwinds from COVID-19 and the slow pace of vaccinations. The recent acceleration of vaccinations with improved supplies may facilitate economic reopening in coming months,” Fan said.

HSBC said the Philippines is likely to achieve herd immunity based on the current pace of COVID-19 vaccine rollout only in April 2024.

The US Federal Reserve hinted at a possible rate hike in 2023 due to the faster pace of recovery from the impact of the COVID-19 pandemic and announced the tapering off from its bond buying program.

The peso is seen strengthening in the second half and may settle at 46 to $1 by the end of this year.

“We anticipate the dollar strength will moderate in coming months when market expectations of inflation and higher bond yields ease. We hold a neutral view on the Philippine peso and forecast it to trade at 46 against the dollar by the end of 2021,” Fan said.

HSBC global chief investment officer Willem Sels expects an extending cyclical recovery, improving earnings and a low but volatile rate environment to support continued outperformance of the risk assets and cyclical sectors despite latest market volatility triggered by inflation and tapering concerns.