No BSP rate hike until Q3 ’22, predicts PNB

Photo courtesy of Bangko Sentral ng Pilipinas Facebook Page

The Bangko Sentral ng Pilipinas (BSP) is likely to keep its key policy rates unchanged until late 2022, during which the economy is likely to have recovered prepandemic vibrancy, an economist from Philippine National Bank (PNB) said.

PNB sees the key policy rates being adjusted by 25 basis points at the end of the third quarter of 2022.

During its eighth and final policy rate-setting for 2021 earlier this month, the BSP maintained its benchmark overnight borrowing rate at a record-low 2 percent. This was even as the central monetary authority raised both its inflation rate estimates by 10 basis points to 4.4 percent and 3.4 percent, respectively, for this year and next year.

Start of cycle

“For next year, we still believe that the BSP will be comfortable to start the RRP (reverse repurchase agreement) hike cycle when the economy is nearer its fourth quarter 2019 level, which we estimate will occur in fourth quarter of 2022,” PNB head of research Alvin Joseph Arogo said in a research note dated Dec. 16.

The BSP has kept its key interest rates at current levels since November 2020 to provide support for the economy amid unprecedented disruptions caused by the COVID-19 pandemic. The domestic economy contracted by 9.6 percent in 2020.

Strong rebound

For the first nine months of 2021, Philippine gross domestic product (GDP) grew by 4.9 percent year-on-year, with third quarter growth alone beat market consensus at 7.1 percent year-on-year.

But while PNB’s baseline forecast is that the BSP would hike interest rates by only 25 basis points for the whole of 2021, Arogo said there were risks that the monetary tightening cycle could come earlier and at a bigger pace.

Arogo said the combination of higher-than-expected GDP growth and inflation rate next year, coupled with the US Federal Reserve’s more aggressive policy rate stance, could result in a 75-basis point rate hike in each quarter starting at the end of the second quarter of 2022, right after the presidential elections.

US Fed moves

“The latest US central bank view now points to earlier and more rate hikes in 2022,” Arogo said, noting that the US Fed’s median federal funds rate outlook for the coming year had now increased to 0.9 percent from 0.3 percent previously.

“This equates to three full rate hikes next year to 0.75 percent to 1 percent [from zero to 0.25 percent currently],” he said.

Moreover, the US Fed is set to double the pace of reduction in the monthly debt purchases to $30 billion. This suggests that tapering will end around March 2022 instead of middle of next year, which US economists believe would open the door for an earlier start in the rate hike cycle, Arogo said. INQ