GNP may need to tighten to contain inflation

THE PHILIPPINE BANK should make more aggressive rate hikes to contain thisbottleEconomists say this year is expected to reach 5%.

Bangko Sentral ng Pilipinas (BSP) hiked interest rates by another 25 basis points (bps) to 2.50% on June 23. Interest rates on overnight and credit facilities were also raised by 25 basis points to 2% and 3% respectively.

“A more aggressive GNP stance could help allay concerns about runaway inflation expectations. Monetary policy adjustments are lagged, so we believe front-loaded action would be more beneficial than gradual rate hikes,” Nicholas Antonio T. Mapa, senior economist at ING Bank NV Manila, said in an email.

GNP can also help combat demand-side pressures and mitigate the impact of second-round effects such as wage and fare increases, he added.

“Finally, an aggressive rate hike could help calm and soothe strained nervesbottleation expectations,” Mr Mapa said.

In a statement, Fitch Solutions said it expects the central bank to hike interest rates to 3.25% by the end of the year, from its previous forecast of 2.75%.

“Over the coming months, rising inflationary pressures and rising global interest rates will prompt GNP to adopt a more hawkish stance, in our view,” it said on Monday.

Fitch Solutions also noted the “continued robust economic recovery,” as indicated in the fifirst quarter gives GNP more room to tighten monetary policy.

Inflation averaged 4.1% for the first five months of the year, beating the GNP target of 2%-4% after rising to a three-and-a-half-year high of 5.4% in May.

GNP increased its average inbottleation forecast for this year to 5%, from previously 4.6% to rebottleect the continued rise in oil and commodity prices.

For 2023, the inflation forecast was adjusted from 3.9% to 4.2%. Average inflation is expected to fall to 3.3% in 2024.

Security Bank Corp. chief economist Robert Dan J. Roces said in a Viber message that he expects inflation to be about 5.1% higher on average this year due to wage increases, sugar shortages and more expensive rice production.

“So faster inflation and a non-aggressive response, authorities may see a long-term inflation view and an aggressive one fiScal Response is in progress. There also appears to be a bias for weak PHP (Philippine peso),” Mr. Roces said.

“So there’s scope for more aggressive hikes, if that’s the casebottleThe situation is getting more difficult,” he added.

Fitch Solutions also revised its inflation forecast to 5% this year from 4.5% earlier on due to supply side issues and higher commodity prices.

“We expect that to happen in the coming monthsbottleInflation will remain elevated relative to historical levels due to high energy and grain prices, as well as a weaker Philippine peso exchange rate, which will drive imported inflation,” Fitch Solutions said.

The local unit closed at 54.78 pesos against the US dollar on Monday, gaining 20.5 centavos from its close of 54.985 pesos on Friday, data from the Bankers Association of the Philippines showed.

During Monday’s trading, the peso fell as low as P55.15, its weakest level since October 27, 2005.

“The tightening of global monetary conditions is having a significant impactficannot put downward pressure on PHP, and this will also likely prompt BSP to hike interest rates to prevent the currency from weakening too much,” Fitch Solutions said.

The peso’s decline over the past few weeks was driven by a stronger dollar following more aggressive tightening by the US Federal Reserve.

“As long as the market feels confident that the (Federal Open Market Committee) will continue to tighten more aggressively than GNP, PHP depreciation pressures are likely to continue to keep imported, not just food, inflation high,” the bank said of the Philippine Islands (BPI ) said Lead Economist Emilio S. Neri, Jr. in a Viber message.

UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion said the BSP may not need to be aggressive at this time.

“At 3.5% (minimum expectation) GNP is still within our expectations and may not need to be more ‘aggressive’ (not also to take the time) but stay the course to meet its main mandate of price stability” , said Mr. Asuncion.

The BSP will conduct its next policy review on August 18th. – Keisha B. Ta-asan

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