S&P sees BSP raising rates over next 2 years

S&P Global Ratings said the Bangko Sentral ng Pilipinas (BSP) is likely to pursue a tightening path over the next two years after keeping interest rates unchanged for more than three years.

In its latest economic snapshots on Asia Pacific, the debt watcher said the benchmark rate in the Philippines would increase by 75 basis points to 3.75 percent next year and by another 50 basis points to 4.25 percent in 2019.

S&P said inflation would accelerate to 3.5 percent next year and 3.7 percent in 2019 from the projected 3.2 percent this year.

Despite the uptick, the consumer price index is expected to stay within the two to four percent target set by the BSP for 2017 to 2020.

Inflation averaged 3.2 percent in the first 11 months after easing to 3.3 percent in November from a three-year high of 3.5 percent in October.

The benign inflation environment and robust domestic demand have allowed monetary authorities to keep interest rates steady to support the country’s growing economy.

The central bank last raised interest rates by 25 basis points in September 2014. The central bank raised benchmark rates by 50 basis points as well as the reserve requirement ratio to 20 percent in 2014.

The Philippines booked a gross domestic product (GDP) growth of 6.9 percent in the third quarter from the revised 6.7 percent in the second quarter, bringing the expansion to 6.7 percent in the first three quarters.

“The third quarter numbers pointed to a slight moderation in domestic demand, especially in consumption. This has been underscored by the most recent remittance growth numbers, which fell into negative territory near the quarter’s end,” S&P said.

Despite this, the debt watcher explained the region-wide electronics export boom has managed to keep economic activity growing at a high pace.

S&P has raised its GDP growth projection for the year to 6.6 percent due to the electronics-driven export boom but kept next year’s forecast at 6.5 percent with the expectation of a return to more of a balance between the traditional pillar of consumption and the newer export engine.

“We expect a tightening bias from the BSP, especially if markets continue to take Fed rate hikes in stride,” it said.

The US Federal Reserve has penned three rate increases in 2018 to match the rate hikes in March, June and December.

The rating agency said the country is likely to book a slight deficit in its current account balance due to slower inflows of remittances, higher energy prices, and imports to feed the export-boom as well as the infrastructure program.

“Though we do not foresee the deficit widening significantly to an unsustainable level, any widening implies that external shocks would have a bigger potential of causing sudden capital outflows,” it said.

S&P said possible sources include an escalation of geopolitical tensions, trade issues, or market turbulence coming from surprises in the pace of Fed normalization.