S&P: Rates to rise as inflation picks up

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely hike rates this year in the face of rising inflation, S&P Global Ratings said, adding to mounting expectations of monetary policy tightening that some say could happen this semester.

Faster price increases for widely used goods and services are likely to prod the central bank to adjust interest rates upward, as monthly inflation is seen approaching the high end of the central bank’s 2-4% target band, the global debt watcher said.

“Inflation is likely to rise significantly this year and we expect the BSP to begin raising interest rates in response,” read S& P’s February edition of its Asia-Pacific Economic Snapshots report

released on Wednesday.

Inflation clocked 2.7% in January — the fastest pace in over two years, sustaining an uptrend observed since the second half of 2016.

Some bank economists had earlier said that the BSP will likely raise rates by up to 50 basis points before the year ends, with one analyst saying that tightening could start as early as next month amid expectations that the United States Federal Reserve will also tweak rates in its March 14-15 review.

The BSP has kept its policy stance unchanged since September 2014, except for procedural cuts in June last year with the introduction of an interest rate corridor system.

Rates are currently set at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate and 2.5% for the overnight deposit rate.

S& P said higher policy rates may be needed to keep up with rising inflation stoked by upbeat domestic activity.

The credit rater forecasts gross domestic product (GDP) growth at 6.4% this year, adding that a 6- 6.5% range should be “easily achievable” for the Philippines.

The economy expanded by 6.8% in 2016, falling closer to the high end of the government’s 6-7% growth goal and cementing the Philippines’ stature as one of Asia’s fastest-growing economies.

“Strong GDP growth continues to be driven by solid consumption and investment. This robust growth and rising commodity prices have been pushing up inflation from below Bangko Sentral ng Pilipinas’ target range,” S&P noted.

“New taxes on petrol and luxury goods are also generating further inflation expectations, but given the low starting point, it is not a big concern.”

The central bank expects inflation to average 3.5% this year on the back of higher oil prices and base effects, while flagging the Finance department’s proposal to raise excise taxes on fuel and cars as a risk.

The peso’s depreciation should support further growth by giving a “boost to remittances,” the debt watcher added, as it would raise the value of money sent home by overseas Filipino workers when expressed in peso terms. Remittances hit a record-high $26.9 billion in 2016, spurring increased consumption that in turn contributes up to three-fifths of GDP.

The peso has been trading above the P50 mark this week, hitting 10-year lows amid market uncertainties with offshore developments. S&P expects the local unit to average P48.44 to the greenback this year, within the central bank’s own P48- to P50per-dollar assumption.