Stanchart sees BSP keeping policy rates steady until 2018

The central bank will likely keep its policy rates unchanged until 2018 with inflation subdued in the near term and rising to a manageable 3.2 percent next year despite changes in tax administration, according to British Standard Chartered Bank.

Stanchart economist for Asia Chidu Narayanan, in its Global Research report (August), adjusted a higher inflation forecast for 2018 but said the Bangko Sentral ng Pilipinas (BSP) has the monetary leeway to extend its accommodative policy stance, contain inflation and balance prices with a growing economy.

The bank has not changed its 3.1 percent inflation forecast for this year – lower than the central bank’s 3.2 percent – but decided to increase the 2018 forecast to 3.2 percent from a previous estimate of three percent. The 3.2 percent forecast is the same as the BSP’s for 2018.

“(The bank) raised 2018 inflation forecast to 3.2 percent from three percent on higher oil prices and the government’s tax reform plan. The central bank, however, is likely to look through this increase in headline inflaThe tion. We expect BSP to keep the policy rate on hold throughout 2017 and 2018,” said Narayanan.

Stanchart’s latest “Economic Alert” on the Philippines said they continue to see a neutral monetary policy stance, with the BSP not touching both the overnight borrowing rate and the standing overnight deposit rate for some time. It said the BSP may ignore the inflation spikes due to the tax reform.

“We believe higher infrastructure investment and the tax reform (likely to be passed in the fourth quarter) will likely add 0.3-0.5ppt to headline inflation next year. Our 2017 inflation forecast is slightly below BSP’s 3.2 percent forecast, but our 2018 forecast is in line,” said Narayanan. “Faster-thanexpected implementation of planned infrastructure investments and higher commodity prices present upside risks to our 2018 forecast.”

The bank’s economist said the central bank has continued to communicate to the market that there is no urgency to hike policy rates. “We think BSP is confident that inflation will remain within its target range, even taking into account likely government spending,” said Narayanan.

He observed that BSP Governor Nestor A. Espenilla Jr. has displayed a sanguine outlook on the underperformance of the peso which has fallen almost three percent for the year so far, at the R51:$1 level.

Stanchart’s GDP growth forecast remains at 6.5 percent in 2017, which it said “would make the Philippines the fastest-growing ASEAN-6 economy for a second consecutive year.” It said the services-sector growth will continue to be the “primary driver of the economy in the next few years as returning overseas Filipinos predominantly join the services industry, increasing its output.”

“Strong domestic demand and steady services-sector growth will likely remain the primary growth drivers; better implementation of planned infrastructure investments might drive even faster growth,” said Narayanan.