Singapore bank forecasts 20 basis points rate hike by BSP

MANILA, Philippines — Singapore’s DBS Bank said the Bangko Sentral ng Pilipinas (BSP) would raise interest rates by another 25 basis points next month as strong domestic demand would keep inflation high until next year.

Masyita Crystallin, economist for the Philippines and Indonesia at DBS, said inflation would average 4.7 percent next year, exceeding the BSP’s two to four percent target.

“Inflation is likely to ease in 2019 as tax related impact dissipates and other idiosyncratic factors come into play. But expansionary fiscal stance will keep domestic demand strong, neutralizing some of the downside,” she said.

Crystallin said higher global oil prices, the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the spike in rice prices pushed inflation above the central bank’s two to four percent target.

Inflation remained elevated at 6.7 percent in October and averaged 5.1 percent in the first 10 months of the year.

This prompted the central bank’s Monetary Board to raise interest rates by a cumulative 175 basis points in five consecutive rate-setting meetings since May this year. Last Nov. 15, the BSP delivered another 25 basis point hike as a proactive action to rein in inflationary pressures.

Based on its latest assessment, the BSP hiked its inflation forecast to 5.3 percent instead of 5.2 percent this year after factoring in the fare and wage hikes but lowered next year’s forecast to 3.5 percent instead of 4.3 percent due to the implementation of non-monetary measures led by the rice tarriffication bill.

Even with the prospect of decelerating inflation, Crystallin said real interest rate in the Philippines remains low compared to emerging market peers.

“Even as inflation peaks and eases further in 2019, the Philippines will need to catch up to be competitive relative to peers,” she added.

The DBS economist expects the BSP to raise benchmark rates by another 25 basis points on its last rate-setting meeting for the year scheduled on Dec. 13.

“We believe more rate hikes are likely as BSP attempts to anchor inflationary expectations, offer competitive real rates, and ease balance of payment pressures,” she said.

In addition to inflation, rates competitiveness and balance of payment (BOP) risks, she said the country’s strong growth compared to peers provides space for further hikes.