THE Bangko Sentral ng Pilipinas (BSP) is expected to raise the key interest rates by 75 basis points (bps) next year after keeping them at record-low for eight consecutive times, Fitch Solutions said.

In a commentary on Monday, the think tank said the BSP will likely start increasing policy rates in 2022, seeing the figure rising to 2.75 percent by end of next year from the current 2 percent.

Overnight deposit and lending interest rates stand at 1.5 percent and 2.5 percent, respectively.

“The BSP’s decision to maintain its key policy rate at 2.0 percent was widely expected given the Philippines’s economic challenges through 2021. Indeed, despite financial markets becoming increasingly hawkish over the Philippines monetary policy tightening cycle, expectations are for hiking to begin in 2022,” the Fitch unit explained.

The think tank noted that keeping the interest rates at the same level has driven the real policy rate into negative at -2.6 percent.

Fitch Solutions said the BSP is likely to look past the higher inflation figure for now amid the signs of economic recovery.

The report cited the improving mobility data and expansion of the country’s Purchasing Managers’ Index (PMI) in October as indications that the country is doing better amid the pandemic.

IHS Markit reported that the Philippines’s PMI in October rose to 51, the highest in seven months, from 50.9 in September.

“In addition, we expect credit demand to pick up heading into 2022, reducing the need for the unprecedented monetary accommodation from the BSP,” the report said.

According to BSP, bank lending grew by 2.7 percent year-on-year in September, which is quicker than the 1.3-percent spike in the previous month. The Central Bank attributed this to “improved economic prospects owing to the gradual lifting of pandemic containment measures.”

“The rebound in credit growth, alongside economic normalization, should boost demand-side inflationary pressures, which have largely been subdued in the Philippines since the onset of the pandemic,” it explained.

The Fitch unit said the BSP is seen to still keep the key interest rates at 2 percent during the last policy meeting next month.

Inflation forecast

FOR next year, the think tank projects inflation to average at 3.7 percent, which is at the upper bound of the government target range.

The return of demand for credit, along with the heightened energy prices and supply chain disruptions, will translate to inflationary pressures, Fitch explained.

“Were core inflation to climb higher [from 3.4 percent year-on-year in October] and producer prices recover strongly through 2022 [producer prices have been in deflation since the onset of the pandemic] then we could see a more aggressive monetary tightening cycle from the BSP,” it added.

The Fitch forecast is higher than BSP’s, which sees inflation slowing down to 3.3 percent next year from 4.4-percent projection for 2021.

However, BSP Governor Benjamin E. Diokno recently said there are still upside risks for next year, citing potential impact of weather disturbances on the prices of key food items, petitions for transport fare hikes and the possibility of a prolonged recovery of domestic pork supply.

“The BSP will continue to prioritize providing policy support for the economy while keeping an eye on the potential risks to future inflation,” Diokno added.

In October, inflation decelerated to 4.6 percent from 4.8 percent a month earlier, averaging at 4.5 percent in the first 10 months.

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