Bangko Sentral ng Pilipinas (BSP) is scheduled to next week and markets are looking for cues on the policy trajectory going forward. BSP has kept rates steady so far this year. We remain of the view that the central bank is slightly behind the curve in policy tightening.

While a move is still unlikely next week, there is a good chance for a 25bps rate hike each in both Q4 2017 and Q1 2018. The softer than expected inflation in Jun-Jul 2017 has provided room for the BSP to refrain from raising rates, DBS Bank reported.

But inflation is slowly gaining momentum yet again, as seen from the latest August print, even if it is set to remain within the 2-4 percent target for now. Additionally, there is plenty of liquidity in the banking system, evident in the near-20 percent loan growth in H1 2017.

More importantly, the upward pressure on global rates may also gain dominance going into 2018. This may put pressure on the peso to weaken further. The peso is already the worst-performing currency in Asia this year, having weakened by 2.8 percent against the US dollar (up to Aug17), or 5.4 percent in trade-weighted terms.

"We don’t expect the BSP to stay tolerant of further peso weakness, amid the potential negative impact on investment-related import demand," the report said.

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