Banks see in­ter­est rates ris­ing

The Freeman - - BUSINESS -

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.

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