By Madelaine B. Miraflor
The Philippine central bank may finally give in to pressure and raise interest rates by at least 50 basis points (bps) in the next quarter, the chief economist for Maybank said.
To recall, the Bangko Sentral ng Pilipinas (BSP) just recently left the overnight borrowing, lending, and deposit rates as is — at 3 percent, 3.5 percent and 2.5 percent, respectively.
This, as it forecasts inflation to remain within target this year until the next.
“I think this is where attention I believe will be quite focused on what the BSP is going to do. This has been this sort of a fairly long expectation that the time has come for BSP to basically adjust its monetary policy but so far there seems to be reluctance on the part of the BSP to do so,” Maybank Kim Eng Regional Head for Economic Research Suhaimi Ilias told reporters on the sidelines of Maybank Invest ASEAN Conference held in Singapore.
Because of this, Maybank continues to expect a modest 25 bsp hike in its rates in the next quarter, which should be followed by another 25 bps increase before the end of the year.
“We are looking at something to happen obviously by the end of next quarter and another one before the year is over, probably in the fourth quarter — very gradual increase in interest rates. The reason is we do see inflation actually breaching four percent, slightly above four percent this year,” he further said.
If the BSP will not do so, he said, there would be an increase in the risk of continued peso sell-off as well as overheating, not to mention the country’s currency is already the worst performing currency in the region.
“Certainly there has already been an impact in terms of currency. Unlike other regional currencies which have strengthened against the US dollar, and strangely despite an environment of weak dollar, Philippine peso has been underperforming,” Ilias said.
“That is why the issue of BSP needing to adjust its interest rates has a lot more to do with the risk of inflation being driven by factors like aside from fairly robust economic growth and domestic demand is the issue of rising global crude oil price accented by the weak peso,” he added.
For this year, Maybank expects the country’s inflation to grow at 4.2 percent, while it sees it easing down to 3.8 percent to 3.9 percent next year.
“I think that gives the BSP the reason to raise interest rates to make sure the gap between interest rates and inflation is not too big because we still see high three percent inflation rate next year,” Ilias said.
The BSP expects inflation to breach the 2 to 4 percent target range for this year, taking note of the impact of the administration’s first tax reform package to consumer prices as well as expected global oil price hike.