PH urged to brace for impact of global inflation

Customer buying vegetables, for story: PH urged to prepare for impact of global inflation, Fed hikes

A customer buys vegetables at a market in Manila on October 5, 2018. A February 2022 World Bank report warns of the impact of global inflation. (PHOTO FROM APPLICANT FILE)

MANILA, Philippines — Philippine monetary authorities should prepare for higher global inflation and U.S. Federal Reserve rate hikes to come soon and quickly, but economists watching the country have mixed forecasts when interest rates nationals would follow.

In a report released last week, the World Bank’s Philippine office said that while local inflation has already stabilized within the government’s 2-4% target range, “rising inflation in the United States States and the upcoming tightening of monetary policy are developments that policymakers need to watch out for.”

The Bangko Sentral ng Pilipinas (BSP) has already acknowledged the risks associated with the normalization of the US Fed. Citing the Fed’s signal in January that a rate hike could be imminent as early as March, the BSP said that “a gradual adjustment in US interest rates could help stop a possible increase in financial vulnerabilities due to political support unprecedented in the midst of 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 policy report. monetary policy published last Friday.

The BSP forecast the US federal funds rate to rise to 1.4% this year and 1.9% next year, thanks to four rate hikes in 2022 and three in 2023. from March 2022 on the basis with a rise of 25 basis points (bps) in each subsequent quarter until the third quarter of 2023 on the basis of the latest forward path,” the BSP said.

Financial institutions and economic think tanks expect the Philippines’ policy rate, held at a record 2% last week, to be raised as the BSP offsets upside risks to short-term inflation. term and a still-fragile economic recovery while rolling back its liquidity support, which has kept the economy afloat amid the protracted pandemic.


After Governor Benjamin Diokno signaled steps toward normalization last week, Deutsche Bank Research said it expects BSP to be “relatively aggressive” against its ASEAN peers and increase interest rates by a total of 125 basis points this year, starting at its next meeting. March 24. In particular, Deutsche Bank forecast increases of 25 basis points each in the first, third and fourth quarters, plus 50 basis points in the second quarter.

“In the Philippines, our rate forecast implies a 1.5% rise in real rates this year, which we think is appropriate given their higher rate of inflation,” Deutsche Bank chief economists said. , Juliana Lee and Michael Spencer, in a February 17 report. Last week, the BSP raised its inflation forecast for 2022 to 3.7% from 3.4% previously due to upside risks from expensive oil and rising domestic food prices.

Singapore-based United Overseas Bank forecast a total of 75 basis points of interest rate hikes in 2022, “with an increase of 25 basis points each quarter starting in the second quarter”, the economist said. UOB principal Julia Goh and economist Loke Siew Ting.

Aggressive Fed

“It is based on more aggressive tightening expected from the Fed, a solid pick-up in domestic growth and rising demand price pressures alongside improving economic activity towards the end of the year,” he said. the UOB.

“On February 10, the Philippine government reopened its borders to fully vaccinated tourists from more than 150 countries, without having to undergo quarantine at the facilities, to stimulate the country’s economic recovery. Tourism accounted for 12.7% of the Philippines’ economic output in 2019. This, along with improved immunization rates and better management of the pandemic in the country, will help restore real GDP (domestic product) growth. raw) at a more solid pace. This justifies a gradual unwinding of aid linked to the pandemic,” added the UOB.

In a Feb. 17 report, ING Philippines senior economist Nicholas Mapa said he expected “a hike in policy rates at the end of the second quarter, given a GDP report probably solid in the first quarter.”

Investment banking giant Goldman Sachs sees normalization beginning, albeit cautiously, in the second half. “As the year progresses, as activity continues to improve, inflationary pressures rise and global risk-free rates rise, we expect BSP to tighten policy parameters by raising policy rates once in the second half of 2022,” Goldman Sachs Economics Research said in a Feb. 17 report.

The two British think tanks Capital Economics and Pantheon Macroeconomics maintained their position that the BSP would postpone any rate hikes this year, as economic growth was still in catch-up mode.

Pantheon Macroeconomics senior economist for Asia, Miguel Chanco, said in a Feb. 18 report that the waiting time for BSP normalization “will be long.” For Chanco, “slack defines what [the Philippines’] the economy, more so than most, and we see no chance of inflation overshooting the target.

In a Feb. 18 report, Gareth Leather, Capital Economics’ senior Asia economist, said the crisis between Ukraine and Russia could drive up oil prices and have a bigger impact on emerging economies. oil-importing Asia. But Leather said “central banks in Southeast Asia, where inflation is generally less of a concern and recoveries less advanced, would be more likely to ‘override’ a rise in oil prices.”


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