The central bank will likely continue to keep its two percent policy rate until the fourth quarter this year and is expected to raise the benchmark by 50 basis points (bps) and another 100 bps in 2023, according to a British bank.
Standard Chartered Bank (Stanchart) analysts said in a press chat on Friday, Jan. 21, that the Bangko Sentral ng Pilipinas (BSP) could be convinced to adjust the policy rate sooner than October or November 2022 if the inflation path does not decelerate as projected for this year. The BSP expects the inflation rate, which was above the two-four percent target in 2021, to move back within the target band for this year and in 2023.
Stanchart economist for Asia and the Philippines, Jonathan Koh, said BSP will increase its rates with the GDP recovery and projected improvements in the employment numbers as the country have more success in dealing with the COVID-19 pandemic.
Stanchart is projecting that in the fourth quarter 2021, GDP may have expanded by 6.5 percent due to increased mobility during the quarter, which would bring the full year growth to 7.1 percent, higher than earlier forecast of five percent. For this year, the British bank expects the local economy to grow by 7.5 percent and by 2023, to slow down to 5.3 percent. They revised higher their GDP forecast for 2022 due to the strong recovery in the third quarter 2021.
For inflation, the bank’s economists see a lower rate of three percent for this year from 4.3 percent in 2021, and 2.9 percent for 2023. For the exchange rate, they predict a weaker peso of P52.50 by end-2022.
Stanchart head of ASA FX Research, Divya Devesh, said the peso vis-à-vis the US dollar will likely close at P52.50 by end-2022 because of the current account deficit. By 2023, the peso may hold its level at P52.70.
“A critical factor is our and BSP’s expectations that the current account deficit for the Philippines is going to widen this year and that’s headwind for the peso,” said Devesh. What is driving that is higher commodity prices since the Philippines is a commodity importer.
Bottomline is that the BSP is expected by the markets to remain accommodative for most of 2022.
The BSP will hold “at least in the first half of this year and with real policy rate in the negative, it will continue to support growth in 2022,” said Koh. As for its 50bps estimate increase for the last quarter this year, he said the “real reason for that is that BSP has cut policy rates by 200bps (in 2020) which means its current policy rate is very accommodative so normalization (is going to happen).”
Ko said the reserve requirement ratio (RRR) which the BSP has also put on hold for 2021, may still be untouched this year. However, the central bank may move to reduce the ratios if credit growth picks up. “But at the moment, liquidity is pretty ample and there’s always the bias to ease RRR as been alluded to (by the BSP governor) as well in a number of times,” he added.
Devesh said that relative to markets’ expectations, Stanchart is generally negative on the dollar, and that the major currency could end up “actually weakening this year (because) the US Fed itself is going to be more dovish than what markets are expecting.”
Stanchart believes the US Federal Reserve will only increase its rates by two times this year versus market expectations of four hikes. Devesh said that since the US Fed may not deliver on the hikes as expected, it will be a pricing risk for the dollar. In addition, the European Central Bank may increase rates sometime in late 2023 and this will be positive for the euros but negative for the US dollar.
“COVID has been a big support for the US dollar in terms of market being risk adverse and holding on to more dollars than needed. As COVID-related fears fades, I think the markets will be more inclined to sell the US dollar which markets have been holding,” said Devesh.