Fitch sees higher borrowing rate

Fitch Solutions reported on Monday that the Bangko Sentral ng Pilipinas (BSP) overnight borrowing rate could rise to 3.25% by the end of the year.

“In the coming months, rising inflationary pressures and higher global interest rates will see BSP become more hawkish, in our view,” Fitch said, lowering its previous policy rate forecast to 2.75%.

The BSP overnight borrowing rate is currently at 2.5 percent, following successive 25 basis point adjustments in May and June that also raised lending and deposit rates to 2.0 percent and 3.0 percent, respectively.

“The Monetary and Financial Board stressed that it is “ready to take the necessary policy measures to bring inflation in line with its target rate over the medium term and meet its primary goal of price stability” and that “upside risk continues to dominate inflation forecasts.” until 2023,” Fitch Solutions said in a statement.

Inflation jumped to a three-year high of 5.4 percent in May.

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Fitch Solutions expects the rate to settle at 5.0%, up from the previously forecasted 4.5%.

Inflation is expected to remain high in the coming months due to high energy and grain prices, as well as a weaker exchange rate that will “raise imported inflation”.

Last Friday, the peso closed at 54,985 pesos to the dollar, its lowest reading in 16 years.

“The tightening of global monetary conditions has put significant downward pressure on the PHP (Philippine peso) and this is also likely to prompt BSP to raise interest rates to prevent the currency from weakening too much,” Fitch Solutions notes.

The release of pent-up demand following the easing of mobility restrictions is also expected to lead to higher price pressures through the end of the year.

According to Fitch Solutions, the risks to the revised key rate outlook are balanced.

“On the other hand, a spike in Covid cases could lead to stricter Covid-19 restrictions and affect the economic recovery. This may lead to the BSP taking a more supportive stance,” it explained.

“On the other hand, the easing of supply chain disruptions, coupled with a stronger-than-expected economic recovery, will allow BSP to focus on its core goal of price stability.”