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BSP seen turning hawkish

BSP seen turning hawkish

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) would likely turn hawkish and deliver aggressive rate hikes over the next two years as the country continues to recover from the impact of the pandemic, Fitch Solutions Country Risk & Industry Research said.

In a commentary titled “Philippine Peso to Weaken Further in 2022,” Fitch Solutions said the Monetary Board is likely to deliver policy rate hikes of 150 basis points in 2022 and 2023.

For 2022, the research arm said the BSP would raise interest rates by 75 basis points to bring the real policy rate to around -0.8 percent.

“On the monetary policy front, we do not expect the real policy rate advantage to have significant benefits for the peso, given the differential will actually narrow in favor of the dollar over the course of 2022,” Fitch Solutions said.

It added the BSP is seen further raising interest rates by another 75 basis points in 2023, and together with some fiscal consolidation, it would boost the peso’s outlook.

“Indeed, in 2023, we expect the BSP to continue hiking, taking its policy rate to 3.50 percent and its real policy positive, providing support for the unit. Moreover, the Philippines’ recovering tourism sector and strong growth outlook will bolster investor confidence towards Philippine assets over the medium term,” it said.

BSP Governor Benjamin Diokno earlier said the Monetary Board is likely to leave interest rates unchanged in the first half, but could cut the reserve requirement ratio as well as its bond buying program within the year.

As part of its COVID-19 response measures, the BSP slashed interest rates by 200 basis points in 2020, bringing the benchmark interest rate to an all-time low of two percent. It has maintained an accommodative monetary policy stance, keeping the low interest rate environment for more than a year to allow economic recovery to gain more traction.

Other pandemic response measures that helped unleash P2.3 trillion into the financial system include the lowering of the reserve requirement ratio, the P540-billion provisional advances to the national government and the purchase of government securities in the secondary market.

These helped the country exit the pandemic-induced recession that stretched through five quarters with back-to-back gross domestic product (GDP) growth of 12 percent in the second quarter and 7.1 percent in the third quarter of last year.

In 2020, the Philippines slipped into recession with a GDP contraction of 9.6 percent.

Fitch Solutions expects the peso to average 51.80 to $1 this year as the dovish stance of the BSP, the loose fiscal policy, the worsening current account deficit as well as the tightening by the US Federal Reserve continue to weigh on the local currency.

The peso emerged as one of the weakest currencies in the region, shedding 6.2 percent to close 2021 at 50.999 from 48.023 to $1 in 2020.

“Looking ahead, we expect this gradual depreciatory trend to persist over the near term as investors favor emerging currencies with higher carry and more hawkish central banks, against the backdrop of US monetary tightening. In addition, the worsening outlook for the Philippines’ current account balance and the likely return of twin deficits risks will further reduce the peso’s attractiveness to investors,” Fitch Solutions added.

It said the peso is seen testing the next support level of 52 to $1 in the first half of this year.

“A combination of elevated commodity prices and rebounding domestic demand for imports will see the current account revert back into a deficit over the course of 2022,” it said.