Fitch Solutions Sees One More Rate Hike, Cuts GDP Growth Forecast

Citing sustained rise of inflation and credit growth, Fitch Solutions forecasts an additional 25 basis points increase in the Bangko Sentral ng Pilipinas’ (BSP) key rates before yearend.

In a research note, the Fitch Group unit contends that while the implementation of tax reforms since January 2018 is a major contributor to price pressures, it considers robust consumer demand due to strong credit growth as the main driver of inflation.

“This is evident from the fact that core inflation has also been on the uptrend,” it said.

In the first seven months of the year, inflation surpassed the government’s two to four percent target until 2020 after it averaged at 4.5 percent.

Last July alone, headline inflation rose to multiyear high of 5.7 percent from month-ago’s 5.2 percent due to big jump of inflation of the food and non-alcoholic beverages index.

During the same month, core inflation, which excludes some volatile food and oil items, registered at 4.5 percent from the previous month’s 4.3 percent, resulting to an average of 3.5 percent.

The report said domestic inflation risks are aggravated by higher inflation expectations and rising global risk aversion, all of which also contribute to the weakness of the Philippine peso.

In a bid to meet its mandate of ensuring price stability and to support economic growth the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) on Thursday hiked anew the central bank’s key rate by 50 basis points.

The rate uptick is on top of the total of 50 basis points increase, at 25 basis points each, last May and June.

To date, rate of the BSP’s overnight reverse repurchase (RRP) faciity is four percent, the repurchase facility rate is 4.5 percent and the deposit rate is 3.5 percent.

Philippine monetary authorities’ decision to increase key rates was made to address continued rise of inflation and address any second round effects.

“While we recognise that the BSP can intervene in the spot market to help stabilize the currency, negative real interest rates and a tightening US Fed suggest to us that further interest rate hikes will likely be needed over the coming quarters to safeguard macroeconomic stability, and this is likely to come at the expense of growth,” the research said.

In the second quarter of the year, the domestic economy grew by six percent, slower than the 6.6 percent in the previous quarter.

With headwinds coming from rising inflation, tighter monetary policy and slower growth, Fitch Solutions cut its 2018 growth forecast for the Philippines to 6.3 percent from 6.5 percent earlier.

The research noted that the economy’s second quarter performance this year was driven by stronger government consumption, fixed capital formation and exports.

However, output of these factors were countered by the deceleration of private consumption and continued rise of imports, with the latter due to rising domestic demand.

The study said the government’s infrastructure program has resulted to increase in stock of durable equipment and faster growth of construction but it “question(s) the “sustainability of the government’s aggressive move, in the absence of improvements to the business environment and larger involvement of the private sector.” (PNA)