BSP to continue raising interest rates next year

The Bangko Sentral ng Pilipinas will likely increase interest rates twice next year as inflation remains a threat to domestic growth, DBS Bank of Singapore said Tuesday.

DBS said in a report monetary authorities should remain on their toes although the prospects of lower oil prices next year could soften inflation.

“As such, even though inflation is expected to soften, it is likely to remain above BSP’s upper limit. Hence, we pencil in another two rate hikes in 2019 and flat in 2020,” DBS said.

The Monetary Board, the policy-making body of the BSP, raised the overnight borrowing rate by 175 basis points this year to 4.75 percent to temper the rising inflation. The board is set to hold its last policy meeting for the year this month.

DBS said the rise in inflation this year was partly caused by the Tax Reform for Acceleration and Inclusion or Train law which imposed higher excise taxes for automobile, fuel products, tobacco and sugar-sweetened beverages.  Higher oil and rice prices also pushed inflation this year.

“The prospect of lower oil price on average next year would soften inflation. Yet, we think, in terms of inflation, it is no time to be complacent just yet. We estimate inflation will ease but would stay above BSP target range at 4.7 percent in 2018 and ease to 3.8 percent in 2020,” DBS said.

Inflation in the first 10 months averaged 5.1 percent, above the target range of 2 percent to 4 percent this year, driven by higher food and oil prices. Inflation in October stayed at a nine-year high of 6.7 percent.

Economists blamed the decline in agricultural output and higher inflation that caused a slowdown in household spending as the culprits in the slower-than-expected 6.1 percent gross domestic product growth in the third quarter.

DBS said while growth decelerated this year, the Philippines remained one of the fastest-growing economies in the region.

“The main support to growth came from both public expenditure and infrastructure projects. Government’s strong commitment to the Tax Reform for Acceleration and Inclusion initiative bore fruits. The revenue generated from Train was used for infrastructures development and direct transfers to support consumption of the lower income,” the bank said.

It said consumption remained robust despite the high inflation, partly due to tax cuts as part of the Train law, which benefited wage earners with annual income of less than P2 million.

It said given the resilience of the economy and the prospect of inflation easing in the next two years, “we believe consumption could grow even stronger.” 

DBS said real GDP growth was expected to pick up to 6.5 percent in 2019 and moderate slightly to 6.4 percent in 2020.

The interagency Development Budget Coordination Committee in October cut the growth target range for 2018 to 6.5 percent to 6.9 percent from the previous estimate of 7 percent to 8 percent, taking into account the slower GDP growth in the first half.

Topics: Bangko Sentral ng Pilipinas , interest rates , DBS Bank of Singapore , Monetary Board
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