Deutsche Bank sees 3 rate hikes in 2019

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may raise interest rates thrice next year as inflation would not likely fall back to the central bank’s two to four percent target until 2020, Deutsche Bank said in its latest research note.

In a report, Michael Spencer, chief economist for Asia at Deutsche Bank, said the country’s monetary policy remains highly accommodative.

He said the absence of bold policies for tighter monetary and fiscal policies would lead to weaker peso prompting the BSP’s Monetary Board to continue raising rates at least until mid-2019.

“So the monetary authorities will carry the burden of trying to stabilize the economy. We expect a rate hike in each of the first three quarters next year,” he said.

The BSP has raised interest rates by 175 basis points in five straight rate-setting meetings this year to curb rising inflationary pressures. It lifted rates for the first time in more than three years with 25 basis points last May 10 followed by another 25 basis points last June 27, 50 basis points last Aug. 9, 50 basis points last Sept. 27, and 25 basis points last Nov. 15.

Inflation remained elevated, averaging 5.2 percent from January to November due to higher oil and food prices particularly rice due to supply issues, the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, and the weaker peso.

The BSP sees inflation averaging 5.3 percent this year after factoring in the wage and fare hikes before easing to 3.5 percent next year due to non-monetary measures including the enactment of the rice tariffication bill.

Deutsche Bank said inflation would remain elevated at 5.2 percent next year from the projected 5.3 percent this year before easing to four percent in 2020.

Spencer said the rice tariffication bill would help, but would not solve the country’s inflation problem. Rice accounts for nearly 10 percent of the CPI.

He added the central bank is pinning a lot of its hopes for declining inflation on the rice tariffication scheme expected to be signed into law before the end of the year.

“The problem with this simple logic, though, is that it might take an infeasibly large volume of imports to drive rice prices down, especially since the prospect of cheaper imports will drive out local producers,” Spencer said.

The economist pointed out the country’s gross domestic product (GDP) growth needs to slow down to below potential and stay there for a few quarters.

“With a few more rate hikes, we think that will happen although we don’t see headline inflation below four percent until 2020,” he said.

Deutsche Bank sees the country’s GDP growth plunging to 5.7 percent in 2019 and further to 5.5 percent in 2020 from the projected 6.2 percent this year.

“The economy is overheating. Strong domestic demand growth over the past three years has pushed core inflation above the central bank’s target,” Spencer said.