BSP rate hike looms in March

Investment banks see the Bangko Sentral ng Pilipinas (BSP) shifting the country’s policy stance to ‘hawkish’ from ‘dovish’ with a 25 basis point rate hike as early as next month.

DBS Bank Ltd. said another rate increase by the US Federal Reserve in March would prod the Philippine central bank to kick off its own policy normalization.

“A rate hike of 25 basis points still looks likely next month,” the Singapore-based investment bank said.

Last Feb. 9, the BSP’s Monetary Board kept benchmark rates unchanged but raised the inflation forecasts to 3.5 percent instead of 3.3 percent this year and to 3.3 percent instead of 3.1 percent next year.

“While both figures are well within the two to four percent target, the BSP highlighted that risks remain tilted towards the upside, particularly given oil price movements,” DBS said.

The investment bank expects the country’s gross domestic product (GDP) growth momentum to remain strong amid robust consumption and investment growth.

Eugenia Victorino, economist at ANZ Bank, said the BSP is seen raising interest rates by 50 basis points this year as pressure on inflation is tilted on the upside.

“Based on this outlook for higher inflation, we and local market participants expect the BSP to raise its policy rate corridor by 50 basis points in 2017,” she said.

Victorino said strong domestic demand is set to push headline inflation higher into the upper half of the BSP target of two to four percent between 2017 and 2020.

Government estimates showed the Comprehensive Tax Reform Program (CTRP) being pushed by the Duterte administration could boost inflation by as much as 1.5 percent over a 12-month period.

“The precise impact would, however, depend on the pace of implementation of tax reforms – staggered implementation would have a milder impact,” she added.

Last June 3, the BSP made an operational adjustment slashing benchmark rates by 100 basis points as part of the shift to the interest rate corridor (IRC) framework, aimed at bringing the market rates closer to the policy rates.

During its first rate-setting meeting, the BSP decided to maintain policy rates at 3.5 percent for the overnight lending facility, three percent for the overnight reverse repurchase facility, and 2.5 percent for the overnight deposit facility.

It also left the reserve requirement ratios unchanged at 20 percent.

The next rate setting meeting of the central bank is scheduled on March 23.