The Bangko Sentral ng Pilipinas (BSP) is expected to raise its policy rate by 25 basis points (bps) in the coming weeks, according to UOB Group Economist Lee Sue Ann. The anticipated move comes as the central bank tries to control rising inflation and a revised timeline for the US Fed Funds Target Rate (FFTR) to hit its peak in the second quarter of 2023.
Lee Sue Ann believes that the BSP will increase its Reverse Repurchase (RRP) rate to 6.75% by the middle of this year. She also forecasts a 25bps hike for each of the next three meetings in the first half of 2023.
Rising Inflation and US Fed Funds Target Rate Revised Timeline
One of the primary reasons why the BSP is expected to raise its policy rate is due to rising inflation. In early February, the Philippine Statistics Authority (PSA) reported a 4.2% inflation rate for January 2022, surpassing market expectations. This inflation rate was attributed to the rising costs of food and non-alcoholic beverages, transportation, and housing, water, electricity, gas, and other fuels.
The BSP also revised its timeline for the US Fed Funds Target Rate to hit its peak in the second quarter of 2023. This shift could lead to tighter financial conditions in emerging markets like the Philippines as foreign investors redirect their investments to US assets, causing outflows and depreciating local currencies.
Impact of Policy Rate Hike on Philippine Economy
The anticipated policy rate hike will have both positive and negative impacts on the Philippine economy. On the positive side, raising the policy rate could help control inflation, which has been a major concern for the BSP. It could also attract foreign investments by increasing the yield of Philippine assets. However, the policy rate hike could also lead to higher borrowing costs for businesses and individuals, which could dampen economic growth. The Philippines is already facing a slowdown due to the COVID-19 pandemic, so the BSP will need to carefully balance its policy decisions to ensure economic stability and growth.