Philippine monetary authorities must brace for higher global inflation and the US Federal Reserve’s rate hikes coming soon and fast, but economists watching the country have varied forecasts when domestic interest rates would follow suit.
In a report last week, the World Bank’s Philippine office said that while local inflation already settled within the government’s 2 to 4 percent target range, “rising US inflation and forthcoming monetary policy tightening are developments for policymakers to watch out for.”
The Bangko Sentral ng Pilipinas (BSP) already acknowledged the risks from US Fed normalization. Citing the Fed’s signal in January that a rate hike could be forthcoming as early as March, the BSP said “a gradual adjustment in US interest rates could help arrest possible rise in financial vulnerabilities from the unprecedented policy support amid the global pandemic.”
“However, unexpected increases in US interest rates could lead to tighter global financial conditions and weigh on the recovery process of emerging market economies, including the Philippines,” the BSP said in its February monetary policy report published last Friday.
The BSP projected the US federal funds rate to rise to 1.4 percent this year and further climb to 1.9 percent next year, through four rate hikes in 2022 plus three hikes in 2023. “The federal funds rate is expected to rise starting in March 2022 based with a 25-basis point (bp) hike in each succeeding quarter until the third quarter of 2023 based on the latest futures path,” the BSP said.
Financial institutions and economic think tanks expect the Philippines’ own policy rate, kept at the record-low 2 percent last week, to be raised while the BSP balances upside risks to near-term inflation and a still fragile economic recovery while unwinding its liquidity support, which kept the economy afloat amid the prolonged pandemic. (©Philippine Daily Inquirer 2021)
