Fitch unit: Philippines' economic recovery to leave room for monetary policy normalization

MANILA, Philippines — Domestic economic growth is expected to leave more room for the Bangko Sentral ng Pilipinas to continue normalizing monetary policy amid a projected global recession and persisting headwinds, according to a Fitch unit. 

In an emailed commentary on Monday, Fitch Solutions noted their upgraded projection of 6.6% gross domestic product this year will allow the BSP to keep raising its key policy rate. 

“We believe that the Philippines' strong economic recovery will provide more room for the BSP to normalise its monetary policy,” the Fitch unit said. 

The central bank kicked off its tightening cycle in May, believing the domestic economy would require less support because of eased pandemic curbs. This has led to an improvement in household spending in past months that was muted in the past two years due to strict quarantine measures.

That said, the domestic economy’s reopening left consumer prices and services skyrocketing to their highest pace since the pandemic, due in part to ramped-up demand and expensive fuel prices. 

Interest rates currently stood at 4.25% after the BSP’s hike last September 22. 

The BSP’s rate hikes since May were done to tame rising inflation.

Fitch Solution’s revised GDP projection is higher than the 5.7% recorded last year, considering external headwinds on growth according to Fitch Solutions. 

“While we expect growth to likely slow in H222 due to an array of economic headwinds stemming from a softening global economic outlook, tightening monetary conditions, and elevated energy prices, the 2022 economic performance would still be a substantial improvement over the 5.6% recorded in 2021,” the Fitch unit said. 

The BSP explained last week that growth will not be hampered as a result of the rate hikes, since demand is firming up already.

Banks use the BSP’s policy rate, which was slashed at the onset of the pandemic to encourage credit growth, as a benchmark when they lend to consumers and businesses.