MANILA, Philippines - London-based Capital Economics Ltd and Singapore-based UBS see the Bangko Sentral ng Pilipinas (BSP) jacking up the country’s interest rates by as much as 100 basis points this year as inflationary pressures continue to build up amid the rising global oil and food prices.
Capital Economics Asia economist Ashira Perera said in its economics update entitled “Rate hikes in the Philippines only a matter of time” that the BSP would staring raising its key policy rates next month to stave off inflationary pressures.
“We are sticking with our long-held view that rates need to move up this year to ensure that inflation pressures remain contained. We continue to expect a first move at the meeting in March and for rates to climb a cumulative 100 basis points by end-2011,” Perera stressed.
The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy. The body has kept its overnight borrowing rate at a record low four percent and its overnight lending rate at six percent for 14 straight policy setting meetings since July 2009 due to the benign inflation outlook.
The Monetary Board is scheduled to conduct its second policy setting meeting on March 24.
The economist said Capital Economics expects inflation this year to fall within the target of three percent to five percent set by the BSP despite the fact that inflation kicked up to a four-month high of 3.5 percent in January to three percent in December.
This forced monetary authorities to raise its inflation forecasts to 4.4 percent instead of 3.6 percent this year and to 3.5 percent instead of three percent next year. The BSP has penned an inflation target of three percent to five percent between 2011 and 2014.
“The inflation forecast for 2011 was revised up from 3.6 percent to 4.4 percent to account for further rises in food, fuel and utility prices. We anticipate that price pressures will grow in coming months, but inflation should still track within the three percent to five percent target range for 2011 in the context of tighter monetary policy,” Perera added.
However, the economist warned that inflation could kick up to a range of five percent to six percent if the BSP keeps its key policy rates unchanged.
“Inflation will probably stay below the five percent target ceiling in 2011, but we judge that this is only likely to happen if policy rates move up towards a neutral range, which we estimate to be five percent to six percent,” Perera explained.
On the other hand, UBS economist Edward Teather said in a research note entitled “Asean: Inflation scenarios” that the BSP would likely raise its overnight borrowing rates by 100 basis points to five percent this year and by another 50 basis points to 5.50 percent next year.
Teather said policy rates in Thailand would increase by 100 basis points to three percent this year and by another 25 basis points to 3.25 percent next year while that of Indonesia would increase by 150 basis points to eight percent this year and next year. Policy rates in Malaysia would remain unchanged at 2.75 percent.