DBS Bank of Singapore expects the Bangko Sentral ng Pilipinas to increase interest rates by 25 basis points next month if the US Federal Reserve goes on with its own adjustment.
The bank in a report over the weekend noted Bangko Sentral’s latest statement that risks to inflation remained tilted toward the upside, particularly the increasing oil prices.
“While previous comments from the central bank officials have suggested that the BSP won’t necessarily respond to any rate adjustment in the US, we reckon that a hike by the US Fed in March will embolden the BSP to kick off its own policy normalization,” DBS said.
“A 25bps rate hike still looks likely next month,” it said.
The Monetary Board, the policy-making body of Bangko Sentral, on Thursday kept the benchmark interest rates steady on its first meeting for the year due to the manageable inflation environment and strong economic growth prospects.
The interest rates of 3.5 percent for overnight lending, 3 percent for overnight borrowing and 2.5 percent for overnight deposits were left unchanged. The reserve requirement ratios were likewise maintained.
Bangko Sentral Deputy Governor Nestor Espenilla Jr. said the board’s decision was based on assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon.
DBS said although Bangko Sentral’s decision to keep the interest rates unchanged was not surprising, several things caught its attention. Alongside the central bank’s statement on GDP growth momentum and ample liquidity, the board revised upward the inflation forecast this year and next due to higher oil prices and weaker peso.
The target for 2017 was increased to 3.5 percent from 3.3 percent made during the Dec. 22 meeting, while the 2018 target was slightly adjusted to 3.1 percent from 3 percent.
“While both figures are well within the 2-4 percent target, the BSP highlighted that risks remain tilted towards the upside, particularly given oil price movements. Interestingly, the central bank has factored in possible [further] weakening of the peso, being seemingly comfortable with recent currency movements,” the bank said.
Inflation accelerated to a two-year high of 2.7 percent last month from 2.6 percent in December 2016 due to higher increments in clothing and footwear, health and transport. It was the fastest since the 2.7 percent rate in December 2014.