Philippine central bank keeps rate on hold in August, likely to commence tightening before end of 2017

The Philippine central bank, BSP, kept its policy rate on hold on Thursday, as was widely expected. The interest rate corridor has been the same at 2.50 percent, 3 percent and 3.50 percent since its formal adoption in June 2016. Inflation forecasts based on a survey of the private sector hiked expectations to 3.2 percent this year and 3.2 percent in the next year.

The risks to future inflation continue to be skewed to the upside, noted Nordea Bank. Headline inflation has already topped off and would possibly stay anchored to the inflation target in 2017. But the knock-on effects of the tax reform on consumer prices are considerable. Combined with strong domestic demand, the 2 percent to 4 percent target range might be at risk depending on when the tax reform would be implemented.

Credit growth continues to be on an uptrend in spite of the rise in bank’s cost of funds. The increase in term deposit auction rates of the central bank has increased the average cost of funds by at least 50 basis points since June 2016. However, the average lending rate has stayed widely steady. Therefore, the monetary policy tightening in inevitable.

“We still expect rate tightening to commence before the end of the year, starting with 25bps hikes in the interest rate corridor in Q4”, added ANZ.

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