BSP seen to raise rates in Q4

The central bank is expected to adjust key rates higher in the last quarter of the year despite benign inflation which could have risen to its high of 3.4 percent in March and April.

ING Bank senior economist Joey Cuyegkeng said that while they agree with market consensus of a possible rates’ hike by end of the year, they also think that because of a manageable inflation outlook, the Bangko Sentral ng Pilipinas (BSP) may continue to hold rates.

“(We) continue to assess the likelihood of steady policy setting up to the end of the year,” noted Cuyegkeng in the latest ING Global Markets Research. “A more modest CTRP impact on inflation in 2018 and 2019 and a steadier peso would sway us to swing to the camp supporting steady policy settings for the rest of 2017.”

He said however that the government’s “tolerance” of a weaker peso could further lead to more depreciation than anticipated.

The peso has weakened since June, falling to 11-month and 13-month lows. But, said Cuyegkeng, the peso was moving in expected direction, same as other Asian currencies.

The peso depreciated further because of continued reporting of the country’s balance of payments, among other factors. ING Bank expects the peso-US dollar rate to close the year with R51.30. It is currently at the R50.70-range.

As for inflation, the bank economist expect inflation pressures to moderate in the next quarters.

“(The) BSP highlighted that inflation may have peaked at 3.4 percent (in March and April) even as BSP expects inflation in August to test this peak,” said Cuyegkeng. “Continued economic growth of around 6.4 percent or better and moderate inflation argue for an extended period of steady BSP-Monetary Board policy settings.”

During the BSP’s last Monetary Board policy meeting, the 2017 inflation forecast was cut to 3.1 percent from a previous 3.4 percent while the 2018 estimate of three percent was unchanged. The same three percent forecast was decided for the 2019 inflation average.

The Monetary Board’s decision to keep key rate steady at three percent is based on its assessment that the inflation environment continues to be manageable. The rates on the overnight lending and deposit facilities were also unchanged, as well as banks’ reserve ratio.