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Bangko Sentral seen raising rates in 2017

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Bangko Sentral ng Pilipinas will likely raise interest rates by 50 basis points in the first half of 2017 if the domestic economy remains robust and inflation accelerates, DBS Bank of Singapore said in a research note Wednesday.

Gundy Cahyadi, economist of the DBS Group Research, said inflation was expected to come in at 3 percent in 2017 and 2.9 percent in 2018.

“Domestic demand is expected to remain firm and continue to support overall GDP growth momentum. We reckon that the domestic story is compelling enough reason for the BSP to eventually tighten its policy stance,” Cahyadi said. 

He said the pace of investment growth would play a role in supporting the consumption story in the nearer-term. Investment growth averaged 25 percent over the past year, an unprecedented feat. 

Cahyadi said while it eased to 23.5 percent year-on-year in the third quarter, it was still outright strong. 

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He said the government’s infrastructure overhaul would continue to drive the construction sector, whose growth gained pace at 15.5 percent in the third quarter, up from 11.8 percent previously.

“The BSP is in no rush to raise interest rates. But if the growth-inflation dynamics progresses as expected, two 25 bps rate hikes seem imminent for the first half of 2017,” Cahyadi said.

Inflation in the first 10 months averaged 1.6 percent, below the government’s official target range of 2 to 4 percent this year. Meanwhile, economic growth averaged 7 percent in the first nine months, at the upper bound of the Duterte administration’s target range of 6 percent to 7 percent this year.

The subdued inflation and robust domestic economic growth prompted the Monetary Board to keep the benchmark interest rates unchanged in its latest policy meeting on Nov. 10. 

The interest rates of 3.5 percent for overnight lending, 3 percent for overnight borrowing and 2.5 percent for overnight deposit facility were left unchanged. The reserve requirement ratios of banks were also kept steady.

The board’s decision was based on its latest assessment that inflation continued to be manageable, with a gradual return to the inflation target range of 2 percent to 4 percent over the policy horizon. 

It said while forecasts indicated that average inflation could settle slightly below the lower edge of the target range in 2016, it was projected to rise toward the mid-point of the target range in 2017 and 2018.

The board said the overall balance of risks surrounding the inflation outlook remained tilted to the upside, owing largely to the pending petitions for adjustments in electricity rates along with the proposed tax policy reform program. 

It also said the slower global economic activity remained a key downside risk.

At the same time, the board observed that prospects for global economic growth remained modest and uneven since the previous meeting. Also, monetary policies in major advanced economies continued to be “asynchronous and the prospects uncertain.”

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