Economic Analysis - Higher Rates Needed To Safeguard Macro Stability - JAN 2018

BMI View: The BSP held its policy rate at 3.00% at its November meeting and sounded relatively neutral. However, inflation rose to a 3-year high in October and is likely to head higher. With the US Fed expected to stay on its interest rate normalisation path, we forecast the BSP to hike interest rates by 50 bps over the coming months to prevent further peso weakness.

The Bangko Sentral Ng Pilipinas (BSP) kept its benchmark overnight repurchase rate unchanged at 3.00% at its monetary policy meeting on November 9, while the corresponding overnight lending and deposit facilities were also held steady 2.50% and 3.50%, respectively. The reserve requirement was also maintained at 20%. Although inflation is still within the central bank's target band of 3+-1%, we note that price pressures have been mounting, and current interest rates are insufficient for an economy that is growing at around 10% in nominal terms. The risk is that if interest rates are kept too low for too long, malinvestment may start to accumulate in the economy. We continue to expect the BSP to hike interest rates by 50bps over the coming months, as inflation continues to trend higher and as the US Fed remains on the path to interest rate normalisation.

Inflation To Continue Climbing

Next Move Likely A Hike
Philippines - Central Bank Watch
Source: BMI, Bloomberg

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