Higher inflation to prompt hikes in rates — Fitch unit

MANILA, Philippines - BMI Research expects the Bangko Sentral ng Pilipinas (BSP) to raise interest rates 50 basis points until next year as inflation is seen hitting the higher end of the two to four percent target this year.

The research arm of the Fitch Group said the BSP is expected to raise its benchmark overnight repurchase rate 25 basis points by year-end and by another 25 basis points in 2018.

“Although we continue to expect higher interest rates over the coming quarters as inflationary pressures mount and risks of capital outflows intensify, we have now revised our forecast for a 25-basis point hike this year and another 25 basis points in 2018,” BMI Research said.

Despite the assurance of BSP Governor Nestor Espenilla Jr. that authorities are in no rush to tighten monetary policy, BMI Research said the central bank is likely to jack up policy rates.

“However, mounting inflationary pressures, risks of capital outflows, and potential for a wider-than-expected fiscal deficit should still see interest rates head higher over the coming quarters,” it said.

During his first rate setting meeting as BSP chief and Monetary Board chairman last Aug. 10, Espenilla announced the Monetary Board decided to keep interest rates unchanged as domestic demand stood firm while inflation remained manageable.

Latest data released by the Philippine Statistics Authority (PSA) showed inflation climbed to 2.8 percent in July from the revised 2.7 percent in June.

“We expect price pressures to continue to rise over the coming months for several reasons,” BMI Research said.

According to BMI Research, commodity and energy prices have been on a broad upswing over the last two months and would continue to head higher in the coming months as the price of oil in the world market is set to average $54 per barrel this year.

BMI Research said the Build Build Build program of the Duterte administration as well as the implementation of the comprehensive tax reform program (CTRP) would further widen the country’s fiscal deficit.

“Taken together, these factors inform our forecast for inflation to rise to four percent by the end of 2017,” it said.

BMI said the peso would continue to be susceptible to further capital outflows in times of rising global interest rates and risk aversion, due to a still-substantial external debt stock at 24 percent of GDP as of end April.

“While the BSP could certainly keep rates low to facilitate the government’s expansionary fiscal plans, this would risk further capital outflows and jeopardize macroeconomic stability,” it said.