BSP seen raising rates twice next year
Deutsche Bank said higher inflation on the back of the country’s strong economic expansion would prompt the Bangko Sentral ng Pilipinas to hike interest rates twice starting the middle of next year. File
MANILA, Philippines — Deutsche Bank said higher inflation on the back of the country’s strong economic expansion would prompt the Bangko Sentral ng Pilipinas (BSP) to hike interest rates twice starting the middle of next year.
In a report, Deutsche Bank chief economist Michael Spencer said the continued weakening of the peso against the dollar as well as the interest rate normalization program of the US Federal Reserve would motivate Philippine monetary authorities to raise benchmark rates in 2018.
“With the peso depreciating already nine percent year-on-year and the Fed expected to hike rates 100 basis points by end-2018, we think inflation concerns will motivate the BSP to raise rates twice next year,” Spencer said.
The investment bank raised its gross domestic product (GDP) growth forecast for the Philippines to 6.4 percent this year before easing to 5.7 percent next year.
Deutsche Bank, likewise, expects inflation to kick up to 3.2 percent this year and to 3.4 percent in 2018.
Deutsche Bank also expects the peso to weaken to 52 to $1 in the fourth quarter and further to 52.5 to $1 in the first quarter of next year and 53.2 to $1 in the second quarter.
“The main drivers of inflation in the Philippines are the output gap, oil prices and the exchange rate. The peso has depreciated almost exactly in line with our expectations at the beginning of the year, but oil prices have been a touch lower. But with growth having been stronger, in retrospect inflation should be higher than it is,” Spencer said.
The economy grew 6.5 percent in the second quarter from 6.4 percent in the first quarter, bringing the average economic growth to 6.4 percent in the first half.
Economic managers retained the GDP growth target at 6.5 to 7.5 percent for 2017 and to seven and eight percent for 2018 while the BSP has set an inflation target of two to four percent until 2020.
“Growth remains above potential, which will lead inflation higher next year and cause BSP to raise rates around mid-year,” he said.
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