Interest rate hike looms by yearend

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may hike key policy rates before the year ends and then again in 2018 on the back of inflationary pressures and higher interest rates in the US, according to BMI Research.

In its latest economic analysis, BMI Research said it sees the central bank hiking rates by 25 basis points in 2017 and also by next year.

“We continue to expect the BSP to hike interest rates by 25 basis points to 3.25 percent before the end of the year, and another 25 basis points in 2018 as inflationary pressures pick up and the US Fed continues to normalize interest rates,” it said.

BMI also said in its report the cost of borrowing is “currently too low for the level of economic growth.”

“We highlight the risk that the record low interest rates may lead to speculative and unproductive investment decisions, posing increasing downside risks to macroeconomic stability in the coming years. Already, we have seen the low interest rate environment since 2010 lead to heavy lending by commercial and universal banks to the real estate sector, with the sector loan exposure growing at around or more than 20 percent for the 25th consecutive quarters through June 20 17,” it said.

The BSP in a monetary policy meeting last week decided to leave benchmark rates unchanged but vowed to keep a watchful eye on inflation.

It maintained its benchmark overnight repurchase rate at three percent while also keeping the overnight deposit and lending facilities rates steady at 2.50 percent and 3.50 percent, respectively.

Reserve requirement ratio was also held at 20 percent.

“Although the central bank is of the view that inflation will remain firmly within the government’s target over the coming quarters, we highlight that interest rates are currently too low for an economy which is growing at around 10 percent in nominal terms,” BMI said.

As far as inflation is concerned, BMI expexts it to climb to four percent by the end of 2017 before averaging four percent in 2018 .

The BSP has retained the inflation forecast for 2017 and 2018 at 3.2 percent but adjusted the 2019 assumption to 3.2 percent instead of 3.1 percent

 “Firstly, commodity and energy prices have been on a broad upswing over the last two months, and we continue to expect prices to remain supported over the coming quarters . Secondly, loan growth has been on a steady uptrend since the start of 2016 , with the latest figure in July coming in at 19 .3 percent y-o-y, versus 17 percent in January, and far outpacing nominal GDP growth of around nine to 10 percent,” BMI said.