Think tank bets on BSP keeping key rates steady

MANILA, Philippines - Capital Economics said the Bangko Sentral ng Pilipinas (BSP) is set to keep interest rates steady amid robust domestic demand and the stable inflation environment.

 In its latest Emerging Asia economic outlook, the think tank said low interest rates would continue to provide support to the domestic economy while inflation would remain within the two to four percent target range of the BSP.

 Capital Economics said the country’s gross domestic product growth would ease to 6.5 percent this year and next year from 6.9 percent last year while inflation would accelerate to an average 3.5 percent this year before slowing down to three percent next year from 1.8 percent the previous year.

“Accordingly, the central bank is likely to keep its policy rates ate their current low, supportive levels,” the think tank said.

 Save for the operational adjustments last June with the launch of the interest rate corridor (IRC) system, the BSP’s Monetary Board has kept interest rates steady since September 2014.

 According to Capital Economics, stronger global growth should provide a boost to export demand over the next year while strong income growth, healthy household balance sheets and buoyant remittances would help support private consumption growth.

 It added government spending would remain strong after President Duterte announced his intention to build upon the efforts of his predecessor in increasing infrastructure spending to address the historical problem of underinvestment.

 The think tank said the low level of government debt means there is scope for the government to increase spending.

 “Healthy fundamentals mean the economy is well-placed to grow strongly over the medium term. The Philippines has some of the most growth-favorable demographics in the region,” it said.

 However, Capital Economic said the main risks to the outlook center on the uncertain political outlook amid Duterte’s numerous offensive statements, his controversial war on drugs and his abandoning of the country’s long-standing security alliance with the US risk unnerving investors.

 Furthermore, there is also a risk that President Duterte’s fixation on law and order would distract from reforms needed to enhance growth.

 “The upshot is that, notwithstanding some risks, we see plenty of potential for the economy to continue growing at a decent pace,” Capital Economics said.