DBS sees inflation uptick to prompt rate hike
DBS economist Gundy Cahyadi said the odds for a 25-basis point rate hike towards the end of the year remain good. File
MANILA, Philippines — DBS Bank Ltd of Singapore said the Bangko Sentral ng Pilipinas (BSP) is seen turning hawkish and raising interest rates either in November or December to address overheating risks in the economy.
DBS economist Gundy Cahyadi said the odds for a 25-basis point rate hike towards the end of the year remain good.
The BSP’s Monetary Board has two remaining rate-setting meetings this year, on Nov. 9 and on Dec. 14.
He pointed out the central bank is behind the curve in tightening monetary policy.
“In the end, the BSP is now confronted with the tricky challenge of addressing overheating risks in the economy without a large slippage in growth. Going by how the risks have been guiding market rates higher, the central bank is probably moving closer towards a rate hike, which in our opinion, is overdue,” he said.
Cahyadi explained the combined contribution from private consumption and investment to overall gross domestic product (GDP) growth fell to 6.2 percent in the second quarter, the lowest since the fourth quarter of 2014.
On the other hand, investment growth was still running at a double-digit pace, despite having moderated from an average 20 percent in 2015 and 2016.
The economist said the near-20 percent loan growth in the first half of the year continued to point to a banking system flushed with liquidity.
“The central bank would have hiked rates by now if not for softer inflation during the mid-year,” Cahyadi added.
The consumer price index moderated to a five-month low of 2.7 percent in June but has climbed back to a five-month high of 3.4 percent in September.
“This provided room for the BSP to keep its policy rate steady despite its view for inflation to rise in the medium term,” he said.
He saisd, the BSP has kept its policy rate steady as it has been tolerant of the depreciation of the peso against the US dollar.
The peso has emerged as the worst-performing currency in the region, depreciating more than two percent as it is now trading above 51 to $1, its weakest in 11 years.
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