BMI Research keeps forecast of 50 bps hike in key rates

MANILA — BMI Research continues to project a 50 basis points increase in the Bangko Sentral ng Pilipinas’ (BSP) key rates this 2018 as inflation is expected to sustain its uptrend.

In a study, the subsidiary of Fitch Group cited the decision of the BSP’s policy-making Monetary Board (MB) to keep rates steady after its second rate setting meet for the year on Thursday.

Hence, the reserve repurchase (RRP) rate is still at three percent, the repurchase (RP) rate is 3.5 percent and rate of the special deposit account (SDA) facility is 2.5 percent. These three represent the key rate, the ceiling rate and the floor rate of the central bank’s interest rate corridor (IRC).

BSP Governor Nestor A. Espenilla Jr. attributed the MB’s decision to maintain the key rates to expectations of within-target inflation rate in 2019 using the 2006 base year and within-target rate for this and next year using the 2012 base year.

The Board projects inflation to average at 4.5 percent this year and 3.5 percent next year using the 2006 base year and by 3.9 percent this year and three percent next year using the 2012 base year.

The government’s inflation target for 2017-19 is a range between two to four percent.

BMI Research said with inflation seen to breach the target range this year based on the unrebased consumer price index (CPI) “we believe that policy makers will be increasingly compelled to tighten monetary policy in the coming months.”

“Inflation is on a firm uptrend, growth has been resilient, and the Philippine peso has been slumping. We therefore continue to forecast the BSP to hike its policy rate by 50bps to 3.50 percent by end-2018,” it said.

Last February, rate of price increases rose to 3.9 percent from 3.4 percent using the rebased CPI while it ticked-up to 4.5 percent from four percent last January using the 2006 base.

BMI Research forecasts inflation to average at four percent this year.

It said that “although the central bank argued that its ‘baseline forecast’ is for inflation to remain within its 3.0±1.0 percent target in 2018 and is unwilling to hike interest rates preemptively, we see a high chance of inflation overshooting the band in the coming months if nothing is done.”

“With the US Federal Reserve on a firm interest rate normalising path, which will continue to put downside pressure on the Philippine peso, we believe that the BSP will be compelled to hike interest rates by 50bps to 3.50 percent by end-2018 or risks having the economy overheat and the currency sell off further,” it added.