Banks see rate hike this year

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is expected to turn haw-kish and deliver a rate hike in the fourth quarter amid rising inflation and the continued weakening of the peso against the dollar, ING Bank and ANZ Bank said over the weekend.

Joey Cuyegkeng, senior economist at ING Bank Manila, said the BSP is expected to raise benchmark rates by 25 basis points this year and by another 50 basis points next year due to the depreciation of the peso against the dollar.

“To manage the weakness of the Philippine peso, we are still expecting a December BSP-MB policy rate hike of 25 basis points and another 50 basis points in 2018,” he said.

The BSP last raised key policy rates by 25 basis points in September 2014. In June last year, it made an operational adjustment when it lowered benchmark rates as it shifted to the interest rate corridor (IRC) system.

“No change in monetary policy is likely over an extended period,” Cuyegkeng said.

The central bank’s accommodative stance has been supportive of a sustainable economic growth as it allows companies and consumers to borrow at a lower rate to boost investments and private consumption.

Last Aug. 10, the BSP kept interest rates unchanged but raised its inflation forecasts to 3.2 instead of 3.1 percent for this year, to 3.2 instead of three percent for 2018, and to 3.1 instead three percent in 2019.

“The revised inflation forecasts of BSP still indicate that inflation over the policy horizon to remain close to the mid-point of the target inflation range of two to four percent,” he said.

ING Bank sees inflation picking up to 3.5 percent in 2018 and 2019 from the projected three percent this year due to the impact of the comprehensive tax reform program (CTRP).

The country’s gross domestic product (GDP) growth accelerated to 6.5 percent in the second quarter from 6.4 percent in the first quarter while inflation inched up to 2.8 percent in July from the revised 2.7 percent in June.

ANZ Bank economist Eugenia Victorino said the BSP is expected to raise interest rates by 25 basis points in the fourth quarter.

“Considering the rising imbalances of strong credit growth, excessive activity in the real estate sector and current account deterioration, we reiterate our view that a monetary policy tightening is inevitable,” she said.

She cited the momentum in the construction and real estate sectors that remained resilient even as private consumption is starting to settle down at around the long-term trend.

“As a consequence, we are becoming increasingly wary of the quality of growth and the attendant imbalances in the economy. Thus, we still believe that monetary tightening is unavoidable,” Victorino said.

On the other hand, Nomura Securities Ltd said the country’s benchmark rates would likely rise by 50 basis points in the second half of next year due to higher inflation.

“In terms of monetary policy, we reiterate our call that BSP will remain on hold this year before hiking its policy rate by a cumulative 50 basis points in H2 2018, when the output gap is likely to turn more positive and headline inflation resumes its uptrend,” Nomura said.

The investment bank sees the BSP cutting the reserve requirement ratio, currently the highest in the region at 20 percent, this year to be more in line with its regional peers if the inflation outlook remains benign.