The Bangko Sentral ng Pilipinas (BSP) may raise its benchmark rate in September or earlier as higher energy and food prices weigh in on its balancing act to keep the economy afloat, according to a credit watchdog.

Moody’s Analytics in its latest Asia Pacific economic view said that the BSP’s Monetary Board, which has kept a low two-percent interest rate since November 2020 in support of growth, will likely start increasing the policy rate in the third quarter.

“We maintain our expectation that monetary policy will begin normalising in the September quarter. However, should price increases become broad-based, BSP will be pressured to act promptly to curb inflation pressures,” said Moody’s.

“BSP is prioritising economic growth over inflation risks arising from the Russia-Ukraine military conflict (but) the risk of elevated inflation is increasing,” it added.

Moody’s views echoed that of S&P Global Ratings which also expects the BSP to increase the policy rate by 50 basis points (bps) this year to 2.50 percent to contain inflation pressures.

The country’s inflation rate 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.

While the January and February inflation rates were steady at three percent, the Russia-Ukraine war which began on Feb. 24 has been putting pressures on both global and local inflation due to higher energy, fuel and food prices.

For March, the BSP is projecting inflation to increase to 3.7 percent. This is the middle of the central bank forecast range of 3.3 percent to 4.1 percent for March. The government will release the latest inflation number on Tuesday, April 5.

During its March 24 Monetary Board policy meeting, the BSP decided to maintain the benchmark rate at two percent since according to BSP Governor Benjamin E.

Diokno, maintaining a low interest rate will “safeguard the momentum of economic recovery amid increased uncertainty.”

Diokno said the BSP is “keenly aware that inflation is likely to remain elevated in the coming months due mainly to domestic and global supply side pressures. Under these circumstances, it is still best to address these inflationary pressures through direct, non-monetary intervention.”

The BSP said upside risks to inflation have increased in 2022 while for 2023, risks are still broadly balanced. Upside risks come from the shortage in domestic pork and fish supply as well as from the potential impact of higher oil prices on transport fares. Inflation downside risks are mainly COVID-19 infections and emergence of new variants.

To manage price pressures, the BSP is encouraging the government to continue implementation of social protection measures to cushion the impact of higher crude oil prices.

The BSP has laid down several anti-inflation measures that it has recommended to the government for its “heavy lifting” since price pressures in this case are better addressed via non-monetary actions.

Diokno has said that high inflation “is back with a vengeance.” But the Philippines’ inflation expectations are still intact.

“Inflation expectations remained anchored to the target,” he said. Based on the BSP's survey of private sector economists, the respondents expect inflation to settle within the government's target range in 2022, with risks to inflation outlook tilted to the upside, said Diokno.