Expect another 100 bps rate hike, says think tank

MANILA, Philippines — London-based Capital Economics expects the Bangko Sentral ng Pilipinas (BSP) to further raise interest rates by another 100 basis points (bps) before the end of the year as inflation continues to spiral out of control.

In its latest emerging Asia economic outlook titled “ Gradual slowdown to continue,” the think tank said interest rates in the Philippines are set to rise further over the coming months as the central bank looks to clamp down on rising inflationary pressures.

The BSP’s Monetary Board has so far raised interest rates by 150 bps bringing the overnight reverse repurchase rate to 4.50 percent in four consecutive rate-setting meetings to keep inflation expectations well anchored.

The central bank lifted interest rates by 25 bps for the first time in more than three years last May 10 followed by 25 bps on June 20, 50 bps – the biggest in a decade – last Aug. 9 and 50 bps on Sept. 27.

“With the (BSP) worried about inflation expectations becoming increasingly unanchored, another 100 bps of hikes are likely before the year is through,” Capital Economics said.

Inflation averaged five percent in the first nine months, exceeding the BSP’s two to four percent target. The consumer price index leapt to a near-decade high of 6.7 percent in September from 6.4 percent in August.

Based on its latest assessment, the BSP now expects inflation to average 5.2 instead of 4.9 percent for 2018 and 4.3 instead of 3.7 percent in 2019.

Capital Economics sees inflation averaging 5.3 percent this year before easing to 4.5 percent next year and further to four percent in 2020.

“Higher oil prices, a weaker peso and disruption to food supplies from Typhoon Mangkhut (Ompong) mean inflation is likely to remain above the central bank’s target until late 2019. We expect inflation to remain a drag on consumer spending for some time to come,” the think tank added.

It said high inflation and a slowdown in private investment would weigh on the economy over the coming quarters, with the gross domestic product (GDP) growth easing to 6.3 percent this year and to six percent in 2019 and 2020.

The GDP expansion averaged 6.3 percent in the first half  after easing to a three-year low of six percent in the second quarter from 6.6 percent in the first.

Economic managers penciled a GDP growth of seven to eight percent this year from 6.7 percent last year.

“Another drag on growth will come from the export sector. Meanwhile, import growth is set to continue at a rapid pace, driven by the booming demand for capital goods and raw materials to supply the government’s infrastructure drive,” Capital Economics said.

The think tank said the peso is set to depreciate further to 55 to $1 this year and to end next year at a fresh all-time low of 58 to $1.