MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) could raise interest rates by as much as 75 basis points (bps) next year amid the stronger than expected economic growth and elevated inflation in the country, as well as the hawkish stance of the US Federal Reserve, a Philippine National Bank (PNB) economist said.
Alvin Arogo, head of research division at PNB, said the Monetary Board could start hiking interest rates by the second quarter, immediately after the national elections, due to the higher-than-expected gross domestic product (GDP) expansion and high inflation.
“The combination of higher-than-expected GDP growth and inflation rate next year, coupled with the Fed’s more aggressive policy rate stance, could result in our upside view of a 25-basis-point each hike at end-second quarter of 2022, end-third quater of 2022, and end-fourth quarter of 2022,” Arogo said
He said this is 50 basis points higher and one quarter earlier than the bank’s baseline forecast as there is now more pressure from the US Fed.
“The latest US central bank view now points to earlier and more rate hikes in 2022. The median federal funds rate outlook for next year increased to 0.9 percent from 0.3 percent previously. This equates to three full rate hikes next year to 0.75 to one percent from zero to 0.25 percent currently,” he said.
Likewise, Arogo said the US Fed made it clear that it would double the pace of reducing the monthly debt purchases to $30 billion starting March instead of the middle of next year.
BSP Governor Benjamin Diokno has committed to do whatever it takes to help the economy fully recover from the pandemic-induced recession that stretched through five quarters by keeping an accommodative monetary policy stance.
The Monetary Board has kept interest rates at record lows for nine straight rate-setting meetings after delivering an aggressive 200-basis-point cuts in 2020 to soften the impact of the COVID-19 pandemic on the economy.
The central bank last tweaked the overnight reverse repurchase rate in November last year with a 25-basis-point cut that brought the benchmark rate at an all-time low of two percent.
After keeping a patient hand by keeping rates on hold last Dec. 16, the BSP now expects inflation to ease back to the two to four percent target at 3.4 percent instead of 3.3 percent in 2022 from 4.4 percent instead of 4.3 percent for this year.
Moreover, the Development Budget Coordination Committee (DBCC) sees a GDP growth of seven to nine percent in 2022 from the higher five to 5.5 percent this year, reversing the record 9.6 percent contraction in 2020 as the economy stalled due to strict lockdown and quarantine measures to contain the COVID-19 outbreak.
Under its baseline forecast, PNB sees the BSP raising interest rates including the reverse repurchase (RRP) rate by 25 basis points in the end of the third quarter of next year.
“For next year, we still believe that the BSP will be comfortable to start the RRP hike cycle when the economy is nearer its fourth quarter of 2019 level, which we estimate will occur in the fourth quarter of 2022,” Arogo said.