Bangko Sentral may need to hike rates amid rising inflation, weakening peso

THE BANGKO SENTRAL ng Pilipinas (BSP) would need to raise rates twice next year in order to catch up with rising inflation, a weaker peso, and higher global yields, analysts at Deutsche Bank said, even as economic growth is seen to remain upbeat.

“With the peso depreciating already 9% year-on-year and the Fed expected to hike rates 100bps ( basis points) by end- 2018, we think inflation concerns will motivate the BSP to raise rates twice next year,” the German lender said in its monthly economic report published over the weekend.

Market players expect the US Federal Reserve to pursue further rate hikes to normalize yields, which will push global rates upward.

The peso has averaged at P50.1324-per-dollar for the first eight months of the year according to central bank data, slightly higher than the P48-50 range assumed by the country’s economic managers back in May.

The assessment comes even as the bank’s economists raised their growth forecast for the Philippine economy to 6.4% this year from 6.2% previously, on the back of a stronger-than-expected exports story.

“The main reason for these cumulative upward revisions is exports, which are now forecast to rise more than twice as fast as we’d expected in January,” the report read, pointing out that Deutsche’s original forecast was a 5.8% expansion for Philippine gross domestic product (GDP).

Merchandise exports grew by 13.6% from January to June, according to the Philippine Statistics Authority. This supported the 6.5% GDP growth during the second quarter, picking up from

the 6.4% pace clocked in from January-March.

This brought first semester growth to 6.45%, a tad below the 6.5-7.5% GDP growth target of the Duterte administration.

However, the bank’s analysts scaled down their growth estimate for 2018 to 5.7% from 6.5%, as exports growth is expected to normalize. If realized, this would sorely miss the 7-8% growth goal.

“Even with an infrastructure push, fixed investment growth is likely to moderate next year — we see downside risks there — and export growth we continue to expect will be slower next year,” Deutsche Bank said, noting that capital spending will also likely slip of exports dampen.

“Our forecast assumes this overshooting will be corrected over the next two quarters. But there is a risk that export growth falls correspondingly below our forecast in the first half of next year.”

On the other hand, the global lender said rising commodity prices would likely prompt the BSP to consider raising policy rates twice in 2018, in order to catch up with market dynamics.

Deutsche Bank sees inflation averaging 3.2% this year and 3.4% by 2018, which would pick up from the 1.8% average in 2016. Still, the higher readings fall within the central bank’s 2-4% target band. In particular, the economists see inflation logging above three percent “over the coming five quarters.”

Inflation has averaged 3.1% as of end-August, a tad below the central bank’s 3.2% full-year forecast.

The BSP has kept its monetary policy stance unchanged since September 2014, except for procedural adjustments in the benchmark rates as it made the shift to an interest rate corridor system last year.

The central bank opted to keep rates steady last month as it saw manageable inflation and sustained domestic economic activity over the near term.