Banks see interest rates rising

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 percent next year against the BSP’s 3.4 percent 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 percent target band and could be the highest annual average since 2014’s 4.1 percent. 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 percent as of end-October, matching the BSP’s estimate for the entire year. Last month’s reading at 3.5 percent is the fastest in nearly three years.

Still, the BSP’s policysetting 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.