British giant HSBC said the Bangko Sentral ng Pilipinas (BSP) will likely start raising its benchmark rate within the first quarter of 2022 and to increase it three times, bringing the current two percent policy rate to 2.75 percent by the end of next year.
HSBC managing director and chief investment officer for Asia, Fan Cheuk Wan, expects three 25 basis points increase to the BSP key rate to be spread out next year. “The market will expect the Philippines will likely be amongst the first Asian economy to start policy normalization and raising policy rate (next year),” she told HSBC’s online press briefing to discuss its 2H2021 Investment Outlook on Tuesday.
Wan also said the Philippines similar with other Asian countries, will be able to withstand a taper tantrum from the normalization of the US policy rate which the bank expects will begin in December this year.
The country’s healthy reserves of $107 billion, strong peso at P48:$1, and manageable inflation outlook is its fundamental strength to buck any capital outflows due to a taper tantrum, she added. “We do expect the Philippine market to become more resilient to the tapering shock compared to 2013 (because) this time, the strong (gross international) reserves provide a critical buffer for the Philippine economy to withstand the market uncertainty,” said Wan.
For now, with inflation still above the government’s two-four percent target, Wan expects the BSP to keep the policy rates on hold at two percent until the first rate hike in the first quarter next year. The BSP will be meeting on Thursday for its fourth policy meeting for this year. At two percent benchmark rate, the central bank’s interest rate is at its lowest level since 2018.
“We currently expect the BSP to keep policy rate on hold at two percent until the first rate hike that we project are in the first quarter of 2022, given that inflation concerns still top the agenda of the central bank. We think the gradual policy normalization in 2022 would remain relatively cautious,” said Wan.
HSBC has a GDP growth projection for the Philippines of 6.3 percent for 2021 and 6.5 percent for 2022. The return to pre-pandemic growth path is expected to convince the BSP to start increasing the policy rate.
Wan said local inflation will start to ease after the interest rate normalization. HSBC projects 3.5 percent inflation for this year and in 2022, based on the assumption that BSP will deliver its interest rate hikes. As for the exchange rate, the bank projects P46 by end-2021 from the current P48 level, that the peso will “regain some strength going to the second half of the year.”
Wan said the slow vaccination rollout in the country continue to be a concern to the pace of post-pandemic recovery.
“Because of the slow pace of vaccinations, we continue to see the Philippine economy remaining on a slow half (2021) to post-pandemic recovery because currently the daily infection cases continue to stay at a relatively elevated level as compared with the rest of Asia,” noted Wan.
“We do expect the accelerated pace of vaccination (with) improved vaccine supply will help to support the consumption recovery in the Philippines later this year. But because of the lingering COVID headwind, we expect the BSP to stay cautious in normalizing monetary policy,” said Wan.
She also said that normalisation of inflation due to falling food prices should ease policy tightening concerns. “We think limited demand-side pressures will keep inflation relatively benign in the second half of the year” while the current “historically low nominal and real interest rates should be accommodative enough to support the economic recovery.”
HSBC said it expects extending a cyclical recovery, improving earnings and a “low but volatile” rate environment to support risk assets and cyclical sectors. Globally, inflation is an issue but most central banks including the Philippines believe that inflation is transitory and that going onto 2022, the pace of policy normalisation will be gradual and slow.
“Global vaccine rollouts are driving economic reopening and a rotation of consumer spending from goods to services,” according to Willem Sels, HSBC global chief investment officer.
“The broadening cyclical recovery, positive earnings outlook and low-but-volatile rate environment will remain supportive of our risk-on strategy and pro-cyclical sector stance,” said Sels.
Sels noted that the US Federal Reserve has been talking about its tapering strategy and he expects an announcement of the tapering in December.