To contain inflation pressures, credit watcher S&P Global Ratings expects the Bangko Sentral ng Pilipinas (BSP) to increase the policy rate by 50 basis points (bps) this year to 2.50 percent from its current two percent for the past 16 months.

In its latest Asia Pacific credit conditions report for the second quarter 2022, entitled “A Divide Takes Shape”, S&P said that most central banks in the region are “poised to raise policy rates” as “investors look set to seek higher spreads to compensate for higher risks.”

As of March 28, S&P expects the country’s GDP will grow by 6.5 percent this year, lower than its November 2021 forecast of 7.4 percent. For 2023, the GDP growth forecast is 6.8 percent, seven percent for 2024 and 6.5 percent for 2025.

S&P’s GDP forecasts are lower than the government’s seven to nine percent estimates for 2021 but within the 2023 and 2024 forecast range of six to seven percent.

While the BSP is seen as raising the policy rate to 2.50 percent this year, S&P only expects a 25 bps increase to 2.75 percent for 2023. By 2024 and 2025, the credit watcher predicts the benchmark rate will be maintained at 3.50 percent. The BSP’s Monetary Board has reduced the interest rates by 200 bps in 2020. The rate has not moved since November 2020.

S&P expects the country’s inflation rate will settle at four percent this year, three percent in 2023, 2.3 percent in 2024 and 2.7 percent in 2025. The exchange rate, meantime, will likely stick to the P51 level vis-à-vis the US dollar.

Asia Pacific central banks’ interest rates outlook will turn hawkish as they control high inflation partly as a result of the Russia-Ukraine war, said S&P.

“Higher energy and commodity prices, exacerbated by the Russia-Ukraine conflict, are increasing regional inflation pressures. The hit would be most keenly felt by the largest net energy importers (relative to GDP) of India, the Philippines, Korea, Taiwan, and Thailand; but it is a plus for the net energy exporters of Australia, Indonesia, and Malaysia,” it noted.

The credit watcher said higher corporate expenses, tighter financing conditions and risk repricing will affect borrowers such as small and medium enterprises and households.

“A combination of higher geopolitical uncertainty, cost inflation and accelerating monetary tightening by major central banks, together with China's property sector problems, is pressing down on regional and global economic growth. In more extreme scenarios, economic recession or stagflation could eventuate,” said S&P.

Philippine inflation is expected to exceed the two-four percent target for this year, with the BSP’s latest forecast pegged at 4.3 percent for 2021 and 3.6 percent in 2023.

“(Inflation) is exceeding targets in India, New Zealand, the Philippines, Singapore, South Korea, and Thailand. While this was largely due to inflation pressure and financial stability considerations, the prospect of rising US interest rates has been a factor as well,” said S&P.

The US Federal Reserves is expected to raise its policy rates seven times this year, first by an initial 50 bps, followed by four to five rate increases, said S&P. In the region, New Zealand, Singapore, South Korea and Taiwan have started to tighten monetary policy.

S&P said commodity price changes and volatility will “strain FX (foreign exchange) and other asset markets, especially in the context of rising US interest rates.”

“Such pressure is most likely in emerging markets that are net energy importers and don't have a significant current account surplus to start with, i.e., India, the Philippines, and Thailand. In all, higher inflation, reduced purchasing power in most economies, and weaker export demand and confidence will weigh on economic growth,” said S&P.