Metro Manila (CNN Philippines, July 18) — Following last weeks surprise hike to 3.25%, think tanks expect the Bangko Sentral ng Pilipinas to raise its key interest rate further amid hot inflation and the pesos weak performance.

We expect at least another two rounds of rate hikes on schedule, taking the key policy rate to above 4%, said Moodys Analytics in a commentary released Monday.

BSP Governor Felipe Medalla announced the 75-basis point or three-quarters of a percentage point hike last week, ahead of the Monetary Boards scheduled policy meeting on August 18, in a bid to fight inflationary pressures as other central banks aggressively increase rates too. After August 18, the other three policy meetings left for the year are scheduled on Sept. 22, Nov. 17 and Dec. 15.

Moodys Analytics associate economist Sonia Zhu said the move suggests the BSPs prior back-to-back 25-bp or quarter-point hikes were insufficient to avert these pressures and anchor inflation expectations.

After all, inflation surged to its fastest in nearly four years at 6.1% in June from 5.4% the month prior.

Imported inflation is also a factor to consider for the Philippines, as around a quarter of the total food supply was imported in 2021, including key staples of rice, corn, pork, chicken, garlic and onions. However, higher interest rates in the U.S. meant that the peso plummeted to a 16-year low against the U.S. dollar, said Zhu.

Fitch Solutions, which expects the BSPs key interest rate to hit 4.25% by yearend, said further hikes will help to limit downside volatility to the peso given policy tightening across the globe.

The Philippine currency weakened past the ₱56-per-dollar level earlier this month after nearly 17 years. Since then, the pesos close has been a few centavos away from the record ₱56.45 set on mid-October 2004.

The Fitch unit specifically mentioned the United States Federal Reserve, now poised to raise rates as much as a full percentage point or 100 basis points in its meeting later this month. This comes as US inflation accelerated to a new record in over four decades in June. https://www.cnnphilippines.com/business/2022/7/7/peso-close-above-56-vs-dollar-after-almost-17-years.html

Policy rate hikes by the BSP should help to offset the depreciatory impact of hot money outflows, by ensuring that real interest rate differentials do not shift too sharply in favour of the US, said the American think tank.

Foreign portfolio investments, known as hot money because of their quick entry to and exit from the country, returned to outflow in May. Outflows netted $270 million during the month, reversing the $1.35 billion in net inflows tallied in April.

Still, Fitch Solutions highlighted the resilience of the Philippine economy to handle any further policy tightening.

Economic output expanded 8.3% in the first quarter, surpassing both market forecasts and the 7.8% growth recorded in the last three months of 2021.

Fitch Solutions sees a 6.1% pace for 2022 amid the resumption of economic activities due to laxer pandemic restrictions. While this estimate is faster than 5.7% in 2021, it falls short of the 6.5-7.5% target band set by President Ferdinand Bongbong Marcos Jr. for this year.

Both Medalla and his predecessor, Finance Secretary Benjamin Diokno, have noted that the economy can handle the recent policy rate increase given favorable conditions.

How will rate hikes affect me?

Banks and lending companies turn to BSP rates as a benchmark for their loan, credit card, and deposit rates.

So simply put: higher rates mean it will cost more to borrow — in turn prompting businesses and consumers alike to spend less and save more. Central banks usually hike rates to help curb accelerating inflation.

However, too little money going around in an economy also slows it down — so there are questions on how rate hikes will impact domestic output.