BSP seen introducing another rate hike this year

MANILA, Philippines — The Bangko Sentral ng Pilipinas will likely undertake further policy action toward the end of the year to curb rising prices of key consumer items, a research firm said.

“BSP has raised policy rates... and with the continued breach of the 4 percent target limit and strengthening US dollar and bond yields, we think that the BSP will raise policy rates again towards the end of 2018 by another 25 basis points,” economists at the First Metro Investment Corp. and the University of Asia & the Pacific said in a May report published Friday.

For the first time in nearly four years, the central bank early this month lifted key rates to tame surging inflation.

Higher interest rates discourage people from borrowing money and spending, causing a decline in demand which, in turn, cools down inflation.

Governor Nestor Espenilla earlier said that in deciding to tweak interest rates, the Monetary Board noted that the latest forecasts have “further shifted higher indicating that inflation pressures could become more broad-based over the policy horizon.”

For Deputy Governor Diwa Guinigundo, the 25 bps adjustment introduced this month was “sufficient to keep the inflation reading at 3.4 percent for 2019.”

Using 2012 as base year, inflation in April accelerated to 4.5 percent, the fastest pace in at least five years.

Year-to-date, inflation averaged 4.1 percent or above the BSP's 2-4 percent target range, which was partly blamed on the Duterte administration's new tax law.

The central bank now expects inflation to remain elevated in the coming months and peak “towards the end of 2018,” citing a possible jump in world crude prices and second-round effects of the tax reform law.

In the same report, analysts at FMIC and UA&P forecast inflation to hit a peak in the second quarter before easing back toward the 4 percent upper limit of BSP’s target in the second half of the year.

They also expect faster economic growth for the Philippines in the April-June period and beyond.

“Apart from infrastructure and capital goods spending, fuller impact of the income tax cut will likely support the economic expansion,” they said.

The BSP will hold its next rate-setting meeting on June 21.