MANILA, Philippines – The research arm of the Fitch Group expects the Bangko Sentral ng Pilipinas (BSP) to raise interest rates by 50 basis points this year amid rising inflationary pressures.
In its recent economic analysis titled “BSP will be forced to hike rates in 2017,” BMI Research said the Philippine central bank would raise the reverse repurchase rate by 50 basis points to 3.50 percent before the end of 2017 after maintaining a neutral monetary stance in the first quarter.
“We expect the BSP to tighten its monetary policy stance as inflationary pressures rise, while it attempts to stem capital outflows amid a more aggressive rate hike cycle in the US,” it said.
The US Fed jacked up rates by another 25 basis points last Dec. 14, its second in a decade, and hinted of three more rate hikes this year and more in 2018 and 2019.
The Fitch research unit added strong economic growth momentum would provide the BSP to hike rates.
BMI Research said rising inflationary pressures, a more aggressive rate hiking cycle signaled by the US Federal Reserve, and strong economic growth momentum would allow room for the BSP to prioritize macroeconomic stability over growth.
Fitch sees the country’s gross domestic product (GDP) growth remaining strong at a range of six to seven percent, driven primarily by strong foreign direct investment and technological transfers from overseas that would enable the country to rapidly increase productivity.
In addition, an improved business environment and a solid economic foundation would enable the Duterte administration to carry out expansionary policies to foster economic growth.
It noted President Duterte’s friendly posture towards Beijing would help boost trade and investment relations with China, further reinforcing the positive view on the Philippines.
BMI Research sees inflation picking up to 3.3 percent this year from the projected 2.2 percent last year. This would be well within the two to four percent target set by the BSP between 2016 and 2020.
“This means that real interest rates will likely fall into negative territory, and BSP would therefore likely be forced to hike interest rates before the end of 2017 in order to maintain macroeconomic stability,” it added.
Upside risks include the pending increase in electricity rates as well as the proposed upward adjustment in the excise tax rates of petroleum products have the potential to be inflationary given that housing, water, electricity, and transportation account for about 30 percent of the consumer price index basket.
Likewise, the expansionary budget of the Duterte administration with the approved P3.35 trillion budget for 2017 would add to the upside inflationary pressures.
Last Dec. 22, the BSP kept interest rates steady despite the much anticipated rate hike in the US.