Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)
Persistently high inflation is raising the odds that the Bangko Sentral ng Pilipinas (BSP) will raise the key interest rate by as much as 50 basis points in the next policy meeting in August, contrary to Monetary Board (MB) signals for gradual tightening.
Moody’s Analytics said in a commentary that headline inflation is “uncomfortably high” in the Philippines, having hit a three-year high of 5.4 percent in May.
“Elevated global fuel and commodity prices led import inflation,” the sister firm of credit rating watcher Moody’s Investor Services said.
“Higher food prices, resulting from supply shortages, and high oil prices are leading to import inflation,” it added. “A prolonged buildup of supply-side pressure increases the risk of second-round effects [such as increases in wages and transport fares].”
Moody’s Analytics said intensifying inflation pressures saw the central BSP raise its 2022 inflation forecast to 5 percent from 4.6 percent.
90-percent chance
The BSP “does not expect inflation to return to its target range of 2 to 4 percent until 2024,” the research firm observed, adding that the BSP officials earlier gave hints that the possibility of a third rate hike in August was 90 percent.
“The odds of a 50-basis point rate hike at the next meeting in August have increased, as the central bank will want to quell inflation and arrest second-round effects,” Moody’s Analytics said. “We believe that the [BSP] is more likely to go with a 50-basis-point hike come August than another 25-bp move.”
In a separate comment, Fitch Solutions said it now expected a rate hike of 75 bps more in the remainder of the year instead of just 25 bps.
Mounting pressures
Fitch Solutions, which is part of the group that runs credit rating agency Fitch Ratings, said that over the coming months, mounting inflationary pressure and rising global interest rates will prompt the BSP to adopt a more hawkish stance.
Fitch Solutions noted that the MB had expressed preparedness “to take necessary policy action to bring inflation toward a target-consistent path over the medium term and deliver on its primary mandate of price stability” and that “upside risk continues to dominate the inflation outlook up to 2023.”
“Moreover, the ongoing robust economic recovery as shown in the first-quarter 2022 GDP (gross domestic product) data will give the BSP more room to tighten its monetary policy stance,” it said.
“Over the coming months, we expect inflation to remain elevated relative to historical levels owing to high energy and grains prices as well as a weaker Philippine peso exchange rate, which will drive up imported inflation,” it added. INQ