ING sees higher inflation, bond yields

MANILA, Philippines — Dutch financial giant ING Bank expects inflation and bond yields to rise as a result of a stronger economic performance for this year.

“With the domestic speed bumps in the rear view mirror, we can expect growth to pickup in 2020 and return to six percent firing on all cylinders form. The acceleration in growth will, however, spark some new developments, with inflation, interest rates and foreign exchange rate all expected to trudge higher for the rest of the year,” said ING Bank Manila senior economist Nicholas Mapa.

The economy grew by an average of 5.8 percent from January to September last year, falling below the revised target of six to 6.5 percent due to the US-China trade war, the tightening cycle by the BSP that saw rates rise by 175 basis points in 2018 and the delayed implementation of the 2019 national budget.

“2019 saw a tale of two halves with domestic speed bumps knocking the Philippines from its usual six percent GDP perch in the first two quarters of the year.  The budget delay and the meltdown of investment momentum in wake of the BSP’s 2018 rate hike cycle slowed an already vulnerable economy, facing the headwinds emanating from the US-China trade war,” Mapa said.

The economist said inflation may accelerate to 3.2 percent this year as the reversal of base effects would cause prices to “bounce.”

“Reverse base effects and the threat of rising crude oil to force inflation to bounce from lows in 2019, but settle around three percent for most of 2020,” he said.

ING Bank also sees the peso depreciating this year as import demand resumes, while portfolio flows thin after additional rate cuts by the Monetary Board.

Last year, the central bank slashed interest rates by 75 basis points, partially unwinding a tightening episode that saw rates jump by 175 basis points in 2018.

“Weaker peso should also feed into slightly higher inflation outlook, but per BSP, exchange rate pass through has waned over the years,” Mapa said.

According to Mapa, the resumption of investment activity and government spending particularly under the Build Build Build program translates to more imports and an increased demand for foreign exchange. “This combined with a narrowing interest rate differential on projected BSP rate cuts attract less portfolio flows to Philippine shores, which was one main factor for the peso’s strong performance in 2019,” he said.