July 27, 2017 | MANILA, PHILIPPINES

Deutsche Bank sees BSP rate hike unlikely for rest of year

THE BANGKO Sentral ng Plipinas (BSP) has sufficient room to hold off on hiking interest rates for the rest of the year after a slowdown in inflation last month and prices expected to continue easing in the coming months, Deutsche Bank said in a report.


Economists from Deutsche Bank said the central bank is not likely to adjust policy rates anytime soon, with tightening more likely to occur in the next nine months.

“Following price developments over the past three months and the BSP’s remarks during meetings in June, we now see the BSP keeping rates steady for the next nine months,” the German bank said in its July 14 report, Asia Economics Monthly: A soft patch.

During its June monetary board meeting -- the second review for the year -- the BSP maintained a 3.5% overnight lending rate, at 3% overnight reverse repurchase rate and a 2.5% overnight deposit rate as it views the increase in prices for widely-used goods and services slowing down in the next few months.

The central bank also trimmed its inflation forecast to 3.1% this year from the 3.4% projected in June. It expects inflation to come in at 3% in 2018 and 2019 -- still within its official 2-4% target band.

After inflation eased in June, Deutsche Bank said it has aligned its inflation estimate with the BSP’s, peaking at 3.1% by October, against its previous forecast of 3.3 to 3.4%.

“With June inflation coming in 30bps below our expectation, we are revising our 2017 inflation forecast 10bps lower to 3.1%, now in line with the BSP’s,” the bank said.

Preliminary results from the Philippine Statistics Authority showed that inflation came in at 2.8% in June, the slowest since January’s 2.7% though faster than June 2016’s 1.9% on the back of softer food, utilities and transport price increases.

“We see inflation inching higher from here, to peak at 3.1%, as against our earlier view of 3.3-3.4%, within August to October. Given these developments, we no longer see the BSP raising rates for the rest of 2017,” Deutsche Bank said.

Meanwhile, analysts from the bank noted the passage of the government’s tax reform program as well as even slower economic growth in the second quarter would not change its view of the BSP’s stance in keeping rates unchanged.

“The tax reform -- expected to be implemented in January 2018 -- should not disrupt this call. Likely softer growth past Q1 would also be supportive of this steady rates call,” the bank said.

The tax plan will raise the excise duties on petroleum products, cars and sugar-sweetened beverages and reduce exemptions to the value-added tax, coupled with a reduction in personal income tax rates.

“The BSP is thus unlikely to carry out preemptive rate hikes to guard against an impending spike in inflation. Rather, with the initial spike in inflation largely cost-push driven, we believe the BSP will wait for a couple of months to monitor second-round effects of the tax reform,” Deutsche Bank said.

However, the German bank noted the central bank could begin tightening policy rates in May of next year.

“Persistently elevated price pressure, reflecting stronger domestic demand, and the sharp jump in inflation expectations, could prompt the BSP to start hiking rates in May 2018,” it said. -- Janine Marie D. Soliman