Fitch: Policy rates may have hit their peak

Policy interest rates have likely reached their peaks for the current tightening cycle, but they will be descending slowly, especially in major and influential economies like the United States, Europe and the United Kingdom, according to Fitch Ratings.

In a commentary, the global credit rating agency noted that policy rates in these economies have been on hold since the third quarter this year.

In addition, Fitch Ratings now expects that the next moves by the central banks of said economies—the US Federal Reserve, European Central Bank and Bank of England —will be rate cuts.

Slower and shallower

However, “easing will be slower and shallower than currently expected by financial markets,” the agency said, adding that earlier monetary policy tightening has resulted in household and corporate credit flows rapidly slowing.

Moves by these central banks, especially the US Fed, influence respective moves by their counterparts in emerging markets such as the Bangko Sentral ng Pilipinas (BSP).

Still, the BSP insists that its policy decisions depend more on domestic economic data rather than what other central banks do.

Last week, BSP Governor Eli Remolona Jr. said it was unlikely that the BSP will ratchet down its policy rate in the next few months.

This benchmark rate is currently at 6.5 percent. This has been raised from the pandemic-prompted historic low of 2 percent starting in May 2022.

Remolona said the policy rate was on path of staying at a higher level for a longer period than was previously expected.

“When I say (we are) hawkish, that basically means ‘high for a while,’” he said.

The BSP is particularly wary of the potential impact of the El Nino climate phenomenon on agricultural output and domestic food supply — and consequently on prices of food items — especially if it worsens as forecast.

According to the latest monthly bulletin from the United States Climate Prediction Center, the ongoing El Nino is now more likely than not to become a “historically strong” occurrence in the next two months, with the probability raised to 54 percent from just 35 Percent as assessed a month ago.

The CPC, which is supervised by the US National Oceanic and Atmospheric Administration, El Niño is expected to continue through the Northern Hemisphere winter, but with a 60-percent chance of transitioning into a “neutral” scenario — when there is neither El Nino nor its twin and opposite, La Nina — as early as April.

“Based on the latest forecasts, there is now a 54% chance of a ‘historically strong’ El Nino during the November-January season,” the CPC said.

One such historically strong El Nino occurrence in 2015-2016, which the World Bank said inflicted $325 million or about P18 billion in damage and production losses to the Philippine agriculture sector.