Fitch: Discount rate to peak at 6.5%

Fitch Solutions said the authorities may raise key interest rates by another 50 basis points (bp) before canceling them in the second half of the year.

“[W]and now we think interest rates in the Philippines will peak at 6.50%, revised upwards from our previous forecast of 6.00%,” Fitch said in a Feb. 17 comments released on Monday.

The Monetary Board of Bangko Sentral ng Pilipinas (BSP) ordered a 50 basis point hike last week after inflation surged to 8.7 percent in January, bringing the overall rate hike to 400 basis points after the start of a tightening cycle in May last year.

“The latest decisions were mainly driven by concerns about persistently high inflation, and we believe the BSP tightening cycle will continue into the first half of 2023 to ease inflationary pressures,” Fitch Solutions said in a statement.

He noted that January inflation was the highest since November 2008 and that core inflation, excluding volatile food and energy, had also increased to 7.4 percent.

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As prices are unlikely to ease anytime soon, Fitch Solutions said it now expects inflation to average 6.5% this year, up from 5.5% earlier, and remain above its BSP ceiling target of 4.0% during 2023.

“Our view is also supported by the BSP Monetary Board, which stated that “average inflation is projected to top the 2-4% range at 6.1% in 2023 before returning to its 3.1% target. in 2024,” the statement said. added.

Fitch Solutions said it expects the BSP “to move up 50 basis points to a final rate of 6.50% at the next meeting on May 18”. It does not say that rates will remain unchanged on March 23, when the next meeting of the Monetary Board takes place.

After the first half, Fitch reported that interest rates would be suspended until the end of 2023 due to the stabilization of global monetary conditions and the shift in BSP priorities towards supporting the economy.

“We think the US Fed is likely nearing the end of its tightening cycle and we expect the Fed funds rate to be raised by just 25 basis points to 4.75-5.00% in the first quarter of 2023, even though the risks are weighted to the top.”

This will reduce pressure on the BSP to raise rates aggressively to protect the peso, he added.

While the economy may have outperformed last year, Fitch Solutions said a slowdown is likely in the coming quarters.

“As a result of the lagging impact of sustained inflation, weaker external demand and higher interest rates, we expect real GDP (gross domestic product) growth to slow from 7.6% in 2022 to 5.9% in 2023,” it says. in the message.

Admittedly, the growth rate will be high compared to the standards of most countries. However, this would still mean a lag for the Philippines, especially given that economic growth averaged 6.6 percent between 2015 and 2019.”

Meanwhile, the risks for the latest rate outlook are skewed to the upside.

“First, a sharper-than-expected rate hike by the US Fed could exacerbate downward volatility in the peso, leading to a sharper interest rate hike by the BSP to keep the currency stable,” Fitch Solutions notes.

The central bank will also continue to raise the discount rate to curb inflation if price pressures remain persistently high, he added.

At the same time, the peso is expected to reach 56.50 pesos to the dollar this year, although the currency “is likely to remain stable after the latest BSP monetary policy decision.”

The currency closed at 54.95 pesos against the dollar on Monday, having gained 29 cents since Friday.

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