MANILA, Philippines — Investment banks expect the Bangko Sentral ng Pilipinas (BSP) to maintain a tightening bias as inflation is expected to remain elevated until next year.
Euben Paracuelles, economist at Nomura Securities Ltd., said the central bank’s Monetary Board is likely to jack up interest rates by another 100 basis points over the next six months as inflation is expected to remain above the BSP’s two to four percent target at 5.4 percent this year and 4.2 percent next year.
“We, therefore, remain comfortable with our monetary policy forecast of an additional 100 basis points of rate hikes within the next six months, despite having 150 basis points of hikes by BSP already this year,” Paracuelles said.
The BSP has raised interest rates by 150 basis points so far this year to curb rising inflationary pressures and boost the peso. It jacked up interest rates by 25 basis points for the first time in more than three years last May 10 followed by 25 basis points last June 20, 50 basis points last Aug. 9, and 50 basis points last Sept. 27.
Inflation averaged 5.1 percent in the first 10 months of the year after hitting 6.7 percent in October due to higher oil and food prices, a weak peso, and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
Paracuelles said the case for further tightening remains intact as core inflation continued to climb.
“While some BSP officials have noted that a pause may be considered if inflation momentum eases, we believe the case for hikes remains intact,” he said.
For the rest of the year, Paracuelles said headline inflation would average a still-elevated 6.7 to 6.8 percent.
“That said, with the currency retracing some of its weakness in October, BSP will likely see less need to be as aggressive as its back to back 50-basis point hikes at the last two meetings,” the economist said.
Paracuelles said the BSP would raise interest rates by 25 basis points on Thursday.
On the other hand, Deutsche Bank said in is latest Asia Macro Insight the BSP is likely to raise interest rates by another 100 basis points until the first half of 2019.
Deutsche Bank said inflation would remain elevated at 5.2 percent this year and five percent next year, exceeding the BSP’s two to four percent target.
Higher inflation and interest rates dampen consumer spending, translating to slower economic growth.
The country’s gross domestic product (GDP) grew at its slowest pace in three years at six percent in the third quarter from 6.2 percent in the second quarter and 6.6 percent in the first quarter.
This brought the average GDP expansion to 6.3 percent in the first nine months, lower than the revised 6.5 to 6.9 percent target set by the Development Budget Coordination Committee (DBCC).