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July 21, 2024

Fitch Solutions hikes inflation forecast to 4.5%, breaching BSP’s 2-4% target

Fitch Solutions is now expecting inflation to accelerate and breach the two to four percent target range of the Bangko Sentral ng Pilipinas (BSP) resulting to a more hawkish monetary policy stance.

The research arm of the Fitch Group raised its inflation forecast to 4.5 percent from 3.7 percent for this year. This was in line with the revisions in the projections of the central bank’s Monetary Board.

In its meeting last March 24, the Monetary Board hiked its inflation projections to 4.3 percent instead of 3.7 percent for this year and to 3.6 percent instead of 3.3 percent for next year.

Inflation in the Philippines remained stable at three percent year-on-year in February after it declined by sixth consecutive month through January this year.

“However, we expect this disinflationary pattern to reverse quickly over the coming months as commodity prices have surged following the Russia-Ukraine war and deeper disruptions to global supply chains due to China’s zero-COVID policy have pushed up logistics cost,” Fitch Solutions said.

Furthermore, it added a release of pent-up demand in the Philippines following continued easing of COVID-19 restrictions and still-negative real interest rates will also feed into higher price pressures over the coming quarters.

Fitch Solutions sees the BSP hiring its key policy rate by 75 basis points to 2.75 percent by end-2022 from the current record low of two percent.

“This follows after the BSP met on March 24 and held its policy rate at a record low of two percent since November 2020, but signaled that it “stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations,” Fitch Solutions said.

The research unit expects a combination of rising inflationary pressures, continued economic recovery, and rising interest rates around the world to prompt the BSP to tighten its monetary policy over the coming months.

Fitch Solutions sees the country’s gross domestic product (GDP) growth accelerating to 6.5 percent this year from 5.6 percent, reversing the 9.6 percent contraction booked in 2020 due to the impact of the COVID-19 pandemic.

Although downside risks are rising due to rising geopolitical tensions in Europe and resurgence of COVID-19 waves in some countries, we believe the recovery remains largely on track with the continued easing of remaining mobility and border restrictions.

Furthermore, improving vaccination coverage should allow the economy to normalize at a more sustained pace and reduce the likelihood of another disruptive lockdown.