Bangko Sentral seen raising key rates in Q3

MANILA, Philippines–The Philippines is back to a “sweet spot” of declining inflation and accelerating growth but it will still have to brace for risks posed by financial market volatility as the United States starts raising interest rates, an economist from Dutch financial giant ING said.

Contrary to market consensus that the Bangko Sentral ng Pilipinas would keep interest rates unchanged for the whole year, ING, under its base scenario, thinks the central bank would raise rates by 50 basis points after the third quarter of 2015.

This is in line with the view that the US Federal Reserve would hike its targeted funds rate by 100 basis points toward the end of the year, ING Philippines economist Joey Cuyegkeng said in an economic briefing on Friday.

Some local monetary easing could also be possible, the economist said, if economic growth this year would falter and if other central banks in the region would join the bandwagon of interest rate reduction.

However, ING’s view is that the  growth in the Philippine gross domestic product (GDP) would accelerate to 6.7 percent this year and further to 7 percent next year from 6.1 percent last year.

Inflation rate is also seen to slow down to 2.8 percent or lower this year from 4.1 percent in 2014, Cuyegkeng said.

“The sweet spot is likely to be sustained in the next few years but in the interim we will have volatility in terms of the exchange rate and local rates and ROP (Philippine global cash bonds),” he said.

ING sees the peso ending the year at 45.50 against the US dollar and falling further to 46.20:$1 by the end of 2016.

While local fundamentals are strong—with external flows from remittances and business process outsourcing likely to breach $51 billion in a  couple of years—Cuyegkeng said the market would likely be swayed by external developments.

Tim Condon, ING chief economist for Asia, said investors might reduce exposure to emerging markets, especially those that were being strained by the collapse in commodity prices.