Fitch, Moody’s units see another BSP rate hike

MANILA, Philippines — The research arms of credit raters Fitch and Moody’s expect the Bangko Sentral ng Pilipinas (BSP) to deliver at least another rate hike as part of its tightening cycle to anchor inflation expectations.

In a commentary, Fitch Solutions Country Risk & Industry Research said it sees one more 25-basis-point rate hike as a follow-through to the latest 25-bp increase last March 23.

“The BSP hiked its key policy rate by 25 basis points to 6.25 percent on March 23, and we at Fitch Solutions expect that one more 25-bp rate hike will materialize in May, as inflation will remain well above target until then,” it said.

Since its interest rate liftoff in May last year, the central bank’s Monetary Board has so far raised key policy rates by 425 bps to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 last October.

This brought the overnight reverse repurchase rate to a 16-year high of 6.25 percent, the highest since the 7.50 percent in May 2007 from an all-time low of two percent.

The next rate-setting meeting of the BSP is scheduled on May 18.

According to Fitch Ratings, the economic weakness and a peak in US interest rates would set the stage for the BSP to leave the policy rate on hold at 6.50 percent for the rest of 2023.

“We anticipate that the BSP will deliver one final 25-bp hike at the next meeting in May before keeping the policy rate on hold at 6.50 percent thereafter,” Fitch Solutions said.

The research unit of Fitch said concerns about price stability would spur the central bank toward hiking rates a little further as inflation barely eased to 8.6 percent in February from a 14-year high of 8.7 percent in January.

Inflation accelerated to 5.8 percent last year, well above the BSP’s two to four percent target, from 3.9 percent in 2021.

“Among comparable economies in Asia such as Thailand and Indonesia, inflation in the Philippines is also very high relative to the official inflation target,” Fitch Solutions said.

It expects headline inflation to drop back below the four percent ceiling of the BSP’s target in the second half of the year, with the average accelerating further to 6.5 percent this year.

Fitch Solutions sees the country’s gross domestic product (GDP) growth slowing down to 5.9 percent this year from 7.6 percent last year amid lackluster global demand and the lagged impact of the rate hikes delivered by the US Federal Reserve and the BSP.

Meanwhile, Moody’s Analytics is also expecting the BSP to continue its tightening cycle until inflation trends lower.

In its weekly highlights and preview, Moody’s Analytics said inflation remains sizzling hot in the Philippines.

It said the BSP recognizes that high inflation would be a fixture this year because of food shortages, higher transport fares, electricity rates, and above-average wage adjustments.

“This adds to expectation that the central bank will lift interest rates until inflation is trending lower,” it said.

Due to the favorable inflation outturn in February, the Monetary Board lowered its inflation forecasts to six percent from 6.1 percent for 2023 and to 2.9 percent from 3.1 percent for 2024.