Bangko Sentral seen raising rates twice in 2017

The inflation-targeting Bangko Sentral ng Pilipinas may increase its key interest rates by a total of 50 basis points this year to curb rising inflation, especially with the looming increase in excise taxes, an economist from Citigroup said.

Citi economist Jun Trinidad sees the first interest rate adjustment by the BSP amounting to 25 basis points by May or June, to be followed by another quarter-percentage-point increase in the third quarter.

The economist’s view on monetary policy has turned more hawkish than earlier forecasts. Previously, Citi expected the BSP to raise rates by only 25 basis points in the fourth quarter of this year.

In a research note dated Jan. 5, Trinidad said Citi had accelerated its policy rate hike view to late second quarter “on the back of CPI (consumer price index) trajectory firmly in the 3-percent range in the first half and the excise tax hike approval.”

Prior to any excise tax increase, Citi had projected that the country’s inflation rate would stay below 3 percent this first quarter and remain below this level for the rest of the year.

“Coupled with the passage of excise tax hikes on diesel and gasoline under the proposed tax reform package in the second quarter 2017 that would entail additional upside inflation risk, we believe BSP would not hesitate to hike its overnight borrowing rate by 25 basis points [in] late second quarter 2017,” Trinidad said.

The economist said the likelihood of these interest rate increases has already been flagged by the BSP’s accommodation of term deposit facility auction rates past 3 percent.

Citi expects another increase of 25 basis points in the third quarter, although Trinidad said the likelihood would be stronger if the inflation rate would probe 4 percent in the second half of the year.

“While economic prospects predicated on strong infra spending and job creation can absorb a cumulative 50-bp hike this year, keeping inflation expectations under wraps through liquidity and rate tightening will be a key monetary objective this year,” Trinidad said.

Philippine annual inflation rate increased to 2.6 percent in December from 2.5 percent in November. This brought the full-year inflation average to 1.8 percent. The BSP targeted to keep inflation rate within a range of 2-4 percent for the year.

Trinidad said there was no upside surprise in the December inflation data despite weaker peso-US dollar rate, higher oil/commodity prices and upbeat seasonal holiday demand.

The BSP attributed the uptick in December inflation mainly to holiday season demand alongside weather-related production disruptions that, in turn, led to higher retail prices of food, particularly meat, fish and vegetables. Rice prices were also higher at the end of the harvest season in a number of rice-producing provinces. At the same time, non-food inflation also increased for the month due to higher air and sea travel fares as well as upward price adjustments in domestic petroleum products, mainly gasoline and diesel.

BSP Governor Amando Tetangco Jr. noted that inflation had been on a generally upward trajectory throughout 2016, in line with the national government’s medium-term expectations and the BSP’s projections. Nevertheless, he added that the latest baseline forecasts of the BSP indicated that inflation would likely return gradually to a path consistent with the inflation target of 2 to 4 percent in 2017-2018.