BSP seen keeping rates steady

Investment banks see the Bangko Sentral ng Pilipinas ( BSP) keeping interest rates steady this week amid the country’s sustained economic growth as well as a benign inflation environment.

DBS Bank Ltd. economist Gundy Cahyadi said the central bank’s Monetary Board would likely keep policy rates unchanged during its ratesetting meeting on Thursday.

“Growth is robust and inflation is inching higher. A combination of these is likely to mean BSP will stand pat for now, with a rate hike looming on the horizon,” he said.

According to Cahyadi, core inflation bottomed out in the second quarter of the year. Inflation was steady at 2.3 percent in October, bringing the average inflation to 1.6 percent in the first 10 months of the year.

“Not only has underlying demand remained strong, but inflation expectations have inched up in recent months alongside the rise in food prices,” he said.

Food inflation is currently trending around three percent, offsetting some of the drag prevalent in the housing or utilities and transport components of the consumer price index (CPI).

As the distortion from low oil prices dissipates going into 2017, Cahyadi explained inflation should average 2.6 percent next year, up from a projected 1.6 percent this year.

“Coupled with the anticipated upward pressure from global rates, the higher inflation trajectory is likely to prompt the BSP to tighten its policy stance,” he added.

According to him, the BSP is likely to hike interest rates twice early next year with 25 basis points each.

Eugenia Victorino, economist of the Australia and New Zealand Banking Group Ltd., said inflation is seen averaging 1.6 percent this year before rising to 2.9 percent next year, despite the plan of the Duterte administration to impose higher excise tax on oil.

The BSP has set an inflation target of two to four percent between 2016 and 2018.

“In our view, the forthcoming rise in excise taxes on oil is not likely to threaten the two to four percent target range of the central bank through the 2018 policy period,” she added.

According to Victorino, there is no need for the BSP to provide further support to the robust domestic economy despite the persistent contraction in merchandise exports.

“With a robust domestic growth outlook and expectations of manageable inflation, we expect the central bank to maintain its policy settings before tightening policy rates in the third quarter of 2017,” she said.

The BSP has kept is dovish stance after raising policy rates by 25 basis points in September 2014. It made an operational adjustment on policy rates last June 3 with the introduction of the interest rate corridor (IRC) system.