Fitch Solutions: Key rate to hit 5.75% by mid-2023

THE Bangko Sentral ng Pilipinas (BSP) policy rate will likely peak at 5.75 percent by the middle of next year on account of above-target inflation, Fitch Solutions said on Monday.

The pace of adjustments is expected to slow from last week’s 75-basis-point (bps) increase and the central bank’s policymaking Monetary Board is expected to cap 2022 with a 50-bps hike on December 15.

“With inflation set to induce further rate hikes over the coming months, we now forecast interest rates to rise to 5.50 percent by end2022,” Fitch Solutions said in a report.

“We think that a stabilization in global monetary conditions and headwinds to economic growth are likely to cause the pace of hikes to slow,” it added.

“As such, we expect that the BSP will deliver a smaller 50-bps hike at its final meeting of the year in December, before raising rates further to a peak of 5.75 percent in the first half of 2023.”

The latest rate hike forecasts were said to be in line with the 2022 consensus

but a bit higher than the 5.50 percent originally projected for 2023.

Inflation, Fitch Solutions said, will remain above the central bank’s 4.0-percent ceiling through the first half of 2023, “which will pave the way for further rate hikes.”

Factoring in secondround effects from this year’s surge in global commodity prices, “headline inflation will only drop back below the 4.0-percent ceiling of the BSP’s target in [the second half of 2023].”

The rise in consumer will likely average 5.8 percent in 2022 and still stay above the 2.0- to 4.0-percent target at 5.0 percent in 2023.

“That said, we believe that the BSP will dial back on the pace of tightening going forward,” Fitch Solutions said.

“According to the BSP, the latest sharp increase in policy rates was in part aimed at ‘insulating the economy from external headwinds and exchange rate fluctuations.’ But since October, the peso has started to stabilize against the US dollar and is less overvalued on a real effective exchange rate basis,” it noted.

“Moreover, we think that the US Federal Reserve will only raise interest rates by an additional 50 bps by end-2022 before keeping them steady throughout 2023. If we are right, then there will be less of a need for the BSP to lean toward aggressive rate hikes to defend the peso going forward,” Fitch Solutions added.

“That said, we do see upside risks to our US interest rate forecasts.”

The Fed, which delivered another massive 75-bps increase earlier this month, will hold its final meeting for 2022 on December 13 and 14.

EIREENE JAIREE GOMEZ