Banks see in­ter­est rates ris­ing

Business World - - FRONT PAGE - By Melissa Luz T. Lopez Se­nior Re­porter

IN­FLA­TION could hover close to four per­cent next year on the back of ac­cel­er­at­ing oil prices and tax-re­lated ad­just­ments, in turn putting pres­sure on the Bangko Sen­tral ng Pilip­inas (BSP) to raise pol­icy rates twice in 2018, sev­eral bank an­a­lysts said.

In sep­a­rate mar­ket re­ports, global banks said the cen­tral bank may be hard-pressed to ad­just key rates early next year in or­der to cope with faster in­fla­tion and ris­ing global yields, with a fresh rate hike in the United States ex­pected next month.

“We fear that higher prices may gen­er­ate in­sta­bil­ity in in­fla­tion ex­pec­ta­tions re­quir­ing some tight­en­ing ac­tion from BSP in 2018,” ING Bank N.V. Manila se­nior econ­o­mist Jose Mario I. Cuyegkeng said in a state­ment, adding that he ex­pects in­fla­tion to clock 3.7% next year against the BSP’s 3.4% fore­cast av­er­age.

The up­trend in world crude prices as well as the im­pact of higher tar­iffs un­der the tax re­form pro­gram are ex­pected to drive com­mod­ity costs up, with higher ex­cise taxes on fuel also part of the pack­age.

If re­al­ized, this fore­cast would set­tle close to the high end of the cen­tral bank’s 2-4% tar­get band and could be the high­est an­nual av­er­age since 2014’s 4.1%. Mr. Cuyegkeng said this would prompt the BSP to in­tro­duce rate in­creases in the sec­ond and fourth quar­ters.

In­fla­tion has so far av­er­aged 3.2% as of end- Oc­to­ber, match­ing the BSP’s es­ti­mate for the en­tire year. Last month’s read­ing at 3.5% is the fastest in nearly three years.

Still, the BSP’s pol­icy-set­ting Mone­tary Board kept bor­row­ing rates steady dur­ing last week’s re­view, deem­ing in­fla­tion “man­age­able” and with do­mes­tic eco­nomic ac­tiv­ity re­main­ing up­beat.

An­a­lysts at BMI Re­search are like­wise pen­cil­ing a rate in­crease of 50 ba­sis points from the BSP: “The risk is that if in­ter­est rates are kept too low for too long, ma­l­in­vest­ment may start to ac­cu­mu­late in the econ­omy.”

“We are of the view that the cur­rent low in­ter­est and in­fla­tion en­vi­ron­ment is un­sus­tain­able, and even­tu­ally one or the other will have to rise,” the Fitch unit said, not­ing the need to catch up with the US Fed­eral Re­serve’s ap­proach to rate nor­mal­iza­tion.

Mar­ket play­ers ex­pect the Fed­eral Open Mar­ket Com­mit­tee to raise rates by an­other 25 ba­sis points next month — the third for 2017 — in line with Fed sig­nals ear­lier this year of three rate ad­just­ments.

BSP Deputy Gov­er­nor Diwa C. Guini­gundo re­it­er­ated last week that the Philip­pines does not have to match the Fed’s rate ad­just­ments as do­mes­tic con­di­tions have a big­ger bear­ing as far as the cen­tral bank is con­cerned. He added that the two na­tions have “dif­fer­ent eco­nomic and busi­ness cy­cles” to con­sider.

Ac­cel­er­at­ing loan growth in the Philip­pines cou­pled with in­creased gov­ern­ment spend­ing par­tic­u­larly on in­fra­struc­ture could also push prices higher, BMI said.

ANZ Re­search is hold­ing on to its fore­cast of two rate hikes be­tween Jan­uary- March 2018, while an­a­lysts at No­mura Global Re­search said any rate ad­just­ments will be in­tro­duced be­tween July and De­cem­ber.

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