Fitch Group unit: BSP may have one more rate hike up its sleeves
MANILA— The Bangko Sentral ng Pilipinas has one more rate hike left in its monetary policy holster, which it could fire off if they want to rein in inflation expectations, so said a unit of Fitch Group.
BMI, a unit of Fitch Solutions, made a case for this in an emailed commentary on Monday.
“We also flag growing upside risks to inflation as a result of food supply disruptions caused by adverse weather conditions. This could see the central bank hike once more to anchor inflation expectations,” the commentary read.
They expect the BSP would hike its key policy rate in its meeting in June. This was despite BSP Governor Felipe Medalla hinting at a pause on interest rate actions in the next two or three policy meetings.
Finance Secretary Benjamin Diokno told journalists on Friday that consumer inflation will not be fanned by El Niño, as the state expected the impact of the dry season to be “weak to moderate.” In Diokno’s view, this will not crimp local food production, as was seen in past El Nino events.
As it is, headline inflation has been decelerating in recent months. Latest government data showed that inflation in April slowed to 6.6%, slower compared to the 7.6% in the preceding month.
Brutal inflation was fueled in part by supply chain bottlenecks, a weak peso, and the domestic economy’s reopening towards the end of 2022, fueling an explosion in consumer spending.
Core inflation, computed without volatile items such as fuel, continued to soar, amounting to 7.9% year-on-year in April. This was faster compared to the 2.5% clip recorded a year ago.
That said, the central bank proved keenly aware of this downward trend. They revised their inflation outlook for 2023 and 2024 and paused rate action in the latest Monetary Board meeting.
The BSP’s policy rate stood at 6.25%, as the central bank pumped the brakes on its aggressive rate hikes for the first time since May 2022 to rein in rising inflation.
Despite this, BMI said that inflation’s downtrend could move slower. Economic managers expected inflation will average between 5-7% in 2023, faster compared to the BSP’s annual target of 2-4%.
“While we think that inflation will remain on a broad downward trend through end-2023, the pace of disinflation will likely slow,” the unit of Fitch Group added.