Expect BSP to raise rates by 50 bps next year — BMI

BMI Research said it expects the Bangko Sentral ng Pilipinas (BSP) to raise interest rates by 50 basis points next year due to strong credit growth and robust domestic demand.

The research arm of the Fitch Group now sees the BSP’s Monetary Board keeping interest rates untouched this year but expects a 50 basis point increase in the benchmark overnight repurchase rate in 2018.

It pointed out monetary authorities are likely to keep interest rates steady in their last rate setting meeting for the year scheduled on Dec. 14.

“We believe that the BSP will likely stand pat on its interest rate decision at its last meeting for the year on Dec. 14, but expect the central bank to hike the benchmark interest rates by 50 basis points to 3.5 percent in 2018,” it said.

BMI Research earlier projected a 25 basis point rate hike before the end of the year and another 25 basis points next year.

It pointed out the slowdown in inflation to 3.3 percent in November from a three-year high of 3.5 percent in October provides the BSP some leeway to maintain a loose monetary policy.

However, it added inflation is likely to face upside pressures from strong credit growth and higher commodity prices amid a strong economic growth environment.

The BSP has an inflation target of two to four percent between 2017 and 2020.

The country’s gross domestic product (GDP) growth accelerated to 6.9 percent in the third quarter from the revised 6.7 percent in the second quarter, bringing the average expansion to 6.7 percent in the first nine months of the year.

Robust domestic demand and the benign inflation environment have allowed the BSP to keep an accommodative policy stance to support the expanding economy. It last raised interest rates by 25 basis points in September 2014.

BMI Research also noted the peso has been the worst performing currency in the region shedding closed to two percent year-to-date primarily due to the normalization path being taken by the US Federal Reserve.

“With the peso already one of the worst performing currencies in the region, and the US Federal Reserve set to continue on its rate hiking cycle, the central bank is therefore likely to tighten monetary policy in an effort to safeguard macroeconomic stability,” BMI Research said.