The Bangko Sentral ng Pilipinas is likely to raise interest rates twice next year on rising inflation and weak peso, Deutsche Bank said in a report over the weekend.
“Our estimate of potential growth in the Philippines is 6 percent, and with growth expected to remain above that pace at least through year-end, and the peso expected to continue to depreciate, we expect inflation over the next few quarters to continue to rise,” the bank said.
The bank said with the peso depreciating 9 percent year-on-year and the Federal Reserve expected to hike rates 100 basis points by end-2018, “we think inflation concerns will motivate the BSP to raise rates twice next year.”
Inflation in the first eight months averaged 3.1 percent, slightly higher than the midpoint of the target range of 2 percent to 4 percent this year. For the month of August alone, inflation accelerated to a three-month high of 3.1 percent from 2.8 percent a month ago.
The main drivers of inflation are the output gap, oil prices and the exchange rate.
Deutsche forecasts inflation to settle above 3 percent and possibly breach the 4-percent level in the coming quarters. The bank, however, said its inflation forecast did not incorporate the tax reform package which was recently approved by the House of Representatives and currently at the Senate.
“While we think some version of the bill will pass―and that will potentially add significantly to inflation in early 2018―we won’t include it in our forecasts until we know the details…,” it said.