The Market Monitor Minding the Nation's Business
By Riza Lozada
An uptrend in prices will likely result to upward adjustments in the Bangko Sentral ng Pilipinas’ (BSP) key rates, studies said.
Last October, inflation rose to 3.5 percent from the previous month’s 3.4 percent, bringing the 10-month average to 3.2 percent, within the government’s two to four percent target for 2017 to 2019.
BMI Research, a unit of Fitch Group, in a study said that “although inflation is still within the central bank’s target band, we note that price pressures have been mounting.”
It cited that “current interest rates are insufficient for an economy that is growing at around 10 percent in nominal terms.”
“The risk is that if interest rates are kept too low for too long, malinvestment may start to accumulate in the economy,” it said.
Last November 9, the BSP’s policy-making Monetary Board (MB) maintained anew the central bank’s key rates citing that inflation remains manageable.
To date, the BSP’s reverse repurchase (RRP) rate is three percent, the repurchase (RP) rate is 3.5 percent and rate of the special deposit account (SDA) is 2.5 percent.
Reserve requirement ratio (RRR) of universal and commercial banks (U/KBs) is still at 20 percent.
BMI forecasts inflation to continue its uptick partly due to the expected increase of Federal Reserve key rates.
“We forecast the BSP to hike interest rates by 50 basis points (bps) over the coming months to prevent further peso weakness,” it said.
BMI projects inflation to rise to around four percent by the end of this year and average at four percent next year “as commodity prices are likely to remain on a broad uptrend, and this should feed into higher transportation and production costs.”
It also sees outstanding loans of banks to sustain its current uptrend, with total loans rising by 19.6 percent year-on-year as of end-September and household loans by 17.8 percent during the same period.
These growth rates are higher than the nine to 10 percent expansion of nominal domestic output, it said.