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The Bangko Sentral ng Pilipinas (BSP) is expected to undertake cumulative rate increases of 50 basis points in 2017, followed by 75 basis points in 2018. The recent appointment of Deputy Governor Nestor Espenilla to take the helm at the central bank is unlikely to shift the focus of the BSP from inflation-targeting. The combination of strong growth and rising inflation keeps our call for interest rate hikes to start in Q3 unchanged, ANZ Research reported.
The central bank kept its interest rates steady as was broadly expected. The interest rate corridor (IRC) was also kept unchanged at 2.50, 3.00, and 3.50 percent since the formal adoption of the IRC in June 2016. Risks to inflation remain skewed to the upside. Headline inflation expectations of the private sector remain in the upper half of the central bank’s 2-4 percent target range, even though the forecasts were unchanged at 3.4 percent for 2017 and 3.0 percent for 2018.
Growth is running strong on all cylinders. Household consumption and private investment are holding up. Government spending is robust and exports are improving. This will keep the central bank vigilant against the persistent rise in demand-pull price pressures.
The policy overnight reverse repo (RRP) rate has been negative in real terms since February. The last time the BSP embarked on a tightening cycle in mid-2014, the real policy rate was negative. The window to keep interest rates steady is closing.
"Against a backdrop of robust growth and rising inflation, the time is drawing near for interest rates to be increased. We reiterate our expectation for the central bank to start raising its interest rate corridor by Q3," the report commented.
