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Business

BSP seen to hike rates by up to 50 bps this year

Louise Maureen Simeon - The Philippine Star

MANILA, Philippines — The Bangko Sentral ng Pilipinas is expected to resume its tightening cycle as early as within this quarter and may deliver up to 50-basis-point rate hikes until year end.

In its latest Emerging Asia outlook, Capital Economics said  the Philippine economic recovery continues to gain momentum and inflation concerns are rising, which may prompt the Bangko Sentral ng Pilipinas (BSP) to start tightening  its monetary policy.

The think tank said rate hikes may begin this second quarter with 25 basis points and another 25 basis points toward the end of the year.

“The BSP has signaled that it is planning to normalize policy provided that economic recovery remains on track,” Capital Economics said, adding that “the weakness of inflation means the tightening cycle is likely to be very gradual. ”

Earlier this week, BSP Governor Benjamin Diokno hinted at a possible increase in policy rate by June.

The BSP has been keeping the benchmark interest rate at an all-time low of two percent for the past 17 months or since November 2020 when it delivered the last 25- basis point rate cut.

This is still part of the government’s move to cushion the impact of the two-year pandemic on the overall economy.

Further, the think tank said that the huge toll of pandemic disruptions remain, which means that output would still be behind its pre-crisis trajectory.

Nonetheless, Capital Economics still raised its gross domestic product (GDP) forecast for the Philippines to 7.5 percent from its earlier projection of 7.2 percent.

This is still a significant jump from the 2021 growth of 5.7 percent. However, it falls at the lower end of the government’s seven to nine percent target for the year.

“GDP likely edged up in the first quarter despite a massive Omicron wave. With virus cases now very low and restrictions to activity all rolled back, the economy is likely to rebound strongly,” Capital Economics said.

It noted that ramped up COVID vaccination allowed governments in the region to keep economies open.

While the output gap will narrow gradually over the coming quarters, helped in large part by a gradual return of international tourists, Capital Economics maintained that significant long-term damage has been done.

Business insolvencies, weaker household balance sheets and labor market scarring are seen resulting in a big permanent hit to output.

The think tank also warned that new headwinds are emerging especially as global tensions that led to elevated global commodity prices are weighing on the purchasing power of consumers.

BANGKO SENTRAL NG PILIPINAS

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