Inflation, interest rates seen moderating

INFLATION is expected to ease across advanced and emerging market economies, and policy rates will likely start declining in most next year, Moody’s Investors Service said.

“We expect inflation will continue to moderate across advanced and emerging market economies,” the debt watcher said in a commentary.

“Consequently, policy rates will peak and start to fall in most economies next year; however, rates will remain above levels seen in the last decade.”

Moody’s noted that expectations of extended higher rates were affecting the bond market, keeping long-term yields higher than seen in recent years.

Higher borrowing costs, it pointed out, will hamper spending, investment, employment, and overall economic growth.

“This will weigh on government and corporate revenue, corporate margins, bank asset quality, and structured finance collateral,” Moody’s said.

The impact will differ depending on the sector and country, but overall, borrowers with low credit ratings could struggle to repay debts, leading to more downgrades and defaults on collateralized loan obligations.

“Increased costs from higher rates will also weaken the obligors for assets in auto, credit card, and other consumer asset-backed security transactions,” Moody’s said.

Philippine inflation surged to 6.1 percent in September, rising for the second month in a row from August’s 5.3 percent due to higher food and transport costs.

It is expected to stay high for the rest of the year, and the Bangko Sentral ng Pilipinas (BSP) will likely miss its 2.0- to 4.0-percent target.

In a bid to temper inflation expectation, the BSP ordered an off-cycle rate hike of 25 basis points last week. This brought the central bank’s policy rate to 6.5 percent, the highest since 2007, following rate hikes totaling 425 bps beginning in May last year.

Moody’s said that elevated interest rates increase the risk for lenders and challenge investment strategies that rely on leverage, among other things.

“Uncertainty about the terminal level of interest rates will also lead to financial market volatility, and could lead to stress in parts of the financial system as we saw in March 2023,” it added.