The Philippine central bank kept its policy settings unchanged today, as widely expected. The interest rates were kept on hold. Policy tools have been stable since the formal shift to the interest rate corridor in June 2016 with the overnight deposit account rate at 2.5 percent, overnight lending facility at 3.5 percent, and the policy overnight reverse repo rate at 3 percent.

Inflation expectations stayed in the 2 percent to 4 percent target range. While supply side pressures control the gains in headline prices, solid domestic demand would probably maintain core inflation on an upward trend, noted ANZ in a research report. The Philippine central bank sees inflation risks skewed to the upside and hiked its 2017 and 2018 inflation forecasts to 3.5 percent and 3.1 percent respectively.

Liquidity conditions have begun normalizing after the end-of-year holidays. The auctions for the 7-day term deposits and 28-day term deposits are oversubscribed again. But TDF rates continue to be high in spite of certain marginal easing from its peak in December. This can be seen as a sign of the central bank’s increasing bias to hike rates in the medium term. According to ANZ, the BSP is likely to hike its interest rate corridor by the third quarter.

“We expect inflation to remain on an upward trend initially, pushed by annual gains in commodity-related items over the first half of the year. Meanwhile robust domestic demand, coupled with the government’s push for infrastructure spending, will likely push inflation higher throughout 2017”, added ANZ.