BSP to hike rates faster in 2022 — Fitch Group unit

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Metro Manila (CNN Philippines, September 27) — The Bangko Sentral ng Pilipinas could hike interest rates earlier than expected in 2022 in a bid to normalize monetary policy, Fitch Solutions said.

In a recent commentary, the American research firm said it now expects the central bank to hike a total of 75 basis points next year up from its initial 50 bps forecast bringing the policy rate to 2.75% by year-end.

The Fitch Group unit also flagged policy normalization could begin in the second quarter of next year, ahead of its initial late 2022 forecast.

The BSP currently adopts an accommodative monetary policy stance, keeping interest rates to their record 2% low in a bid to help stimulate economic activity by encouraging borrowing.

"Our expectation for a more hawkish stance from the BSP comes as external monetary policy conditions continue to put pressure on the more dovish emerging market central banks," said Fitch Solutions, noting over half of the Federal Open Market Committee projected a rate hike for the United States next year.

While the BSP has its eyes on supporting pandemic-stricken domestic demand than external pressures, the group said it expects the country to "normalize sooner rather than later to anchor investor appetite for Philippine assets and temper demand-side inflationary pressures."

Similar to the central bank, Fitch Solutions hiked its inflation forecasts for this year and the next. It now expects the rate at which prices of basic goods increase to an average 4.5% in 2021 from the previous 4%, while it forecasts a 3.7% inflation rate for 2022 compared to 3.4% before.

The BSP projects inflation to hit 4.4% this year and 3.3% next year.

"We note pressure could rise for the BSP to hike if inflation proves more sticky and external financing conditions tighten sharply," said Fitch Solutions.