Next move is still likely to be a rate hike

While the Bangko Sentral ng Pilipinas gave no strong indication of what it may do next, we still expect a 25-basis-point hike before the end of the year.
Group Research11 Aug 2017
Photo credit: AFP Photo

As expected, the Bangko Sentral ng Pilipinas (BSP) kept rates steady on Thursday. There was no strong indication of what the BSP may do next, but the central bank provided several important hints. The inflation forecast has been revised up slightly to 3.2% for 2017 and 2018 (from 3.1% and 3.0% previously). And the BSP expects consumer price index (CPI) inflation at 3.1% in 2019, broadly still around the midpoint of its 2-4% target range. The upward revision to inflation came despite the recent moderation in the headline CPI numbers, which suggests the BSP is still watchful of inflationary risks going forward.

At the same time, the BSP indicated its tolerance of a softer currency, as strong import demand is set to persist for now. While the PHP has been the worst performing unit in the region, the BSP expects the depreciation trend to continue. As it is, there was no strong suggestion that the BSP is about to hike rates anytime soon in a bid to slow down the depreciation of the PHP.

Meanwhile, financial market liquidity is still seen to be ample. The central bank stated that it will watch growth momentum closely going forward, amid downside risks stemming from geopolitical factors and policy uncertainties in the global economy. The strength of the economy matters and the BSP may want to take more cues from the 2Q17 GDP growth before deciding on the next course of action. At this juncture, we still expect a 25-basis-point hike before the end of the year.