BSP seen raising rates anew

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) needs to jack up benchmark rates amid concerns of overheating due to the weak peso as well as rising inflation, the DBS Bank of Singapore said in a report.

DBS said the BSP may deliver another rate hike today after it lifted interest rates for the first time in more than three years on May 10.

“Despite this slightly more forgiving global environment, the BSP will probably hike again this Wednesday,” DBS said, adding that “without a clear hawkish stance, concerns of overheating have not gone away, and have kept the door open for more monetary tightening ahead.”

On a month to date basis, DBS said the peso weakened by 1.8 percent as inflation accelerated and stayed above the BSP’s two to four percent target range for the third straight month.

“This comes on top of deficits in the financial and current accounts in the first quarter,” DBS said.

Inflation rose to 4.6 percent in May from 4.5 percent in April, bringing the average to 4.1 percent in the first five months due to higher oil prices and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

The BSP now expects the country’s external payments position to weaken further. It is expecting a higher balance of payments deficit of $1.5 billion instead of $1 billion, as well as a wider current account deficit of $3.1 billion instead of $700 million this year.

However, BSP Governor Nestor Espenilla Jr. said the country’s external payments position remains very manageable.

Espenilla said the projected higher current account shortfall reflects strong import growth due to the increase in imports consisting of capital goods, raw materials, and intermediate products to support the requirements of the rapidly growing economy.

On the other hand, the BSP chief added the balance of payments  is reliably supported by strong structural foreign exchange inflows from revenues from the business process outsourcing (BPO) industry as well as remittances from overseas Filipinos.

“Amid all these developments and given the sustained growth of the economy in recent years, some have raised concerns on potential overheating. To date, we continue to see limited evidence of this based on inflation dynamics as well as output, liquidity, and credit conditions,” Espenilla said.