While some economists are talking about possible rate cuts, BMI Country Risk and Industry Research believes there is one more rate hike on the cards for the Bangko Sentral ng Pilipinas (BSP) next month after its prudent pause from its tightening cycle when it kept rates on hold last week.
The research arm of the Fitch Group flagged growing upside risks to inflation as a result of food supply disruptions caused by adverse weather conditions that could see the central bank hike rates once more to anchor inflation expectations.
'We expect that the BSP will hike once more at the next meeting, which is scheduled on June 22, as disinflation momentum is likely to slow in the near term,' BMI said.
In a commentary titled 'One More Rate Hike on the Cards for the Philippines,' BMI said the decision of the BSP to keep the benchmark interest rate unchanged at 6.25 percent on May 17 marks a pause rather than an end to the monetary tightening cycle.
Inflation averaged 7.9 percent in the first four months despite cooling to an eight-month low of 6.6 percent in April from 7.6 percent in March, but this is still way above the central bank's two to four percent target range.
'While we think that inflation will remain on a broad downward trend through end-2023, the pace of disinflation will likely slow,' BMI said.
While its lowered its inflation forecasts to 5.5 percent from six percent for this year and to 2.8 percent from 2.9 percent for next year, BMI said the BSP noted that the balance of risks to the inflation remains largely tilted toward the upside.
'For now, we are holding on to our forecast for the policy rate to be hiked at least once more by 25 basis points to a terminal rate of 6.50 percent,' BMI added.
It pointed out that the looming threat of weather-related disruption due to El Niño could lead to upside surprise in inflation, as prolonged dry spells over the coming months would curtail food production.
'The impact of food supply disruptions caused by adverse weather conditions could lead to spikes in food inflation, which could see the central bank tighten monetary policy a little more to anchor inflation expectations,' it said.
BMI, formerly Fitch Solutions, said currency weakness induced by the aggressive tightening cycle by the US Federal Reserve last year could resurface again in the next year.
It expects the US Fed to deliver another 25-basis-point hike in June before pausing for the rest of the year.
'While the risks are tilted to the downside as a result of the recent banking stresses in the US, sticky core price pressures and solid incoming economic data suggest it may be difficult for the central bank to justify pausing its hiking cycle,' it said.
After another rate hike next month, BMI said the BSP is expected to keep interest rates steady for the rest of the year.
BMI sees inflation easing to within the central bank's two to four percent target range by the fourth quarter of the year and averaging 6.5 percent this year from last year's 5.8 percent.
The Fitch unit sees the country's gross domestic product (GDP) growth slowing down to 5.9 percent this year after accelerating to 7.6 percent last year from 5.7 percent in 2021.
The Philippines slipped into recession in 2020 when the GDP shrank by 9.6 percent as the economy stalled due to the imposition of strict COVID-19 quarantine and lockdown protocols.
'In the five years preceding the pandemic, the economy grew by an average rate of 6.6 percent annually from 2015 to 2019. We think the economic slowdown will be driven by lackluster global demand and the lagged impact of domestic monetary tightening,' BMI said.
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