Fitch unit: Growth slowdown, peak US rates to prompt BSP to pause tightening
MANILA, Philippines — The Bangko Sentral ng Pilipinas will likely hit the pause button on monetary tightening in May, amid a sputtering domestic economy and peaking US interest rates, so says a Fitch unit.
In an emailed commentary on Monday, Fitch Solutions made the case for their outlook as the threat of rising inflation will loom large in this upcoming decision.
“We anticipate that the Bangko Sentral ng Pilipinas will deliver one final 25bps hike at the next meeting in May, before keeping the policy rate on hold at 6.50% thereafter,” the commentary read.
The BSP told the media after its latest rate-setting meeting last week that it was still too early to tell whether another rate hike was warranted.
Despite this, Finance Secretary Benjamin Diokno expects the BSP will pause its monetary tightening in May. Diokno formerly helmed the central bank under the previous Duterte administration.
The BSP matched the US Federal Reserve's 25 bps hike last week.
On the other hand, headline inflation at home accelerated to a 14-year high of 8.6% year-on-year in February, fueled by supply chain bottlenecks and the Philippine economy’s reopening. Expectations that inflation would peak by the end of 2022 did not hold, despite the BSP’s aggressive rate hikes.
The Fitch unit said that compared to its neighbors, consumer price growth in the Philippines exceeded the official target. To add, they expect inflation will move below the 4% target in the second half of 2023, as Fitch Solutions project inflation will average 6.5% throughout the year.
To combat inflation, the central bank has injected 425 basis points into the key policy rate, which currently hover at 6.25% after delivering another hike in March. Banks and financial institutions use this as a benchmark for handing out loans and credit.
Fitch Solutions noted the BSP’s monetary tightening was far more aggressive compared to its Asian counterparts. Meanwhile, outsized expectations that economic growth will suffer as a result of these rate hikes abound.
Central banks, like the BSP, use rate hikes to rein in demand pressures that are stoking price growth. The higher interest rates work by prompting consumers and businesses to think twice about borrowing money. This, in turn, lessens the money that’s circulating in the economy and chasing a limited supply of consumer items.
To this end, a domestic economy hampered by these rate hikes will compel the BSP to keep rates on hold. The Fitch unit forecast real gross domestic product will hit a wall this year, slowing down to 5.9%, slightly below the Marcos Jr. administration’s growth target of 6-7%.
“We think the economic slowdown will be driven by lacklustre global demand and the lagged impact of domestic monetary tightening,” Fitch Solutions added.
- Latest
- Trending
