The BSP may face risks amidst global policy tightening, according to Fitch Solutions.
BSP — Fitch Solutions Country Risk & Industry Research said that the Bangko Sentral ng Pilipinas may have to confront risks caused by interest rate differentials if it remains accommodative while major central banks are already tightening monetary policy.
Fitch Solutions said in a note on Monday that a narrowing of real interest rate differentials could lead to “hot money outflows and downside volatility for the peso” should the central bank stand pat as the rest of the central banks tighten monetary policy.
According to Fitch Solutions, the Philippine peso has already weakened by around 2.4 percent against the US dollar since the start of the year.
Fitch Solutions expects the peso to continue to weaken because of a likely current account deficit amidst the rise in capital imports and commodity prices. In addition, Fitch Solutions said that it expects the central bank to increase interest rates by 75 basis points by the end of 2022.
BusinessWorld Online reported that the Bank of England and the US Federal Reserve have started raising interest rates in order to tame high inflation.
On Thursday, the Monetary Board maintained the key policy rates at record lows amidst risks that cloud the economic recovery outlook. The central bank raised inflation projections because of the supply shock caused by the Ukraine-Russia war.
According to BSP Governor Benjamin E. Diokno, they do not necessarily have to move in lockstep with the Fed, noting they only consider global developments to the extent they affect the growth and inflation outlook.
Diokno also said the local economy can deal with the market volatility caused by monetary policy tightening through its flexible exchange rate system and strong external buffers.
Still, Fitch Solutions said that the buildup in inflation pressures could prompt the central bank to tighten monetary policy over the coming months.
Aside from the Ukraine-Russia war, Fitch Solutions said that the factors that could cause a faster increase in commodity prices over the next months are the disruption in global supply chains because of the increasing coronavirus cases in Chinese ports like Shenzhen and Hong Kong.
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Fitch Solutions said that it now expects inflation this year to reach 4.5 percent from 3.7 percent previously. This is beyond the 2%-4% target and the central bank’s 4.3% outlook.
Against the backdrop of inflation risks, Fitch Solutions said that a stronger economic recovery should strengthen the case for the central bank to start unwinding its accommodative policy. It maintained its growth projection for the year at 6.5 percent, which is below the 7%-9% target of the government.
“Although downside risks are rising due to rising geopolitical tensions in Europe and resurgence of coronavirus disease 2019 (COVID-19) waves in some countries, we believe the recovery remains largely on track with the continued easing of remaining mobility and border restrictions,” Fitch Solutions said.
In order to ensure a more sustainable recovery, the BSP chief has said that they would remain patient and wait until the 2nd half of the year before assessing the need for a rate hike.
The central bank’s next policy review is scheduled on May 19.
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