By Melissa Luz T. Lopez,
Senior Reporter

THE Bangko Sentral ng Pilipinas (BSP) will still have to raise interest rates by yearend to keep up with faster inflation, analysts at BMI Research said, as they expect prices to rise by as much as 4% later this year.

The Fitch Group unit has said that the central bank is likely to hike rates once within 2017, although lower than the two increases it was previously projecting.

If realized, the projected increase of 25 basis points (bp) would be the first in three years since September 2014.

This will be followed by another 25bp hike in 2018, the research firm said, taking the cue from BSP Governor Nestor A. Espenilla, Jr. who has said the monetary authority is in no rush to tighten its policy stance.

“Inflation in the Philippines inched up to 2.8% year-on-year in July, from a downwardly revised 2.7% in the previous month, and we expect price pressures to continue to rise over the coming months for several reasons,” BMI said in a report released yesterday.

The BSP kept borrowing rates steady during its review last week, noting that inflation remains benign and with domestic activity fairly robust. It kept the overnight lending rate 3.5%, the overnight reverse repurchase rate at 3%,  and the overnight deposit rate at 2.5%. Reserve requirement ratios imposed on banks were likewise kept steady.

This, even as it raised its full-year inflation forecast to 3.2% from 3.1% previously to factor in the uptrend in global crude prices. As of July, headline inflation averaged 3.1%, well within the 2-4% target band.

Apart from inflation, BMI analysts pointed to robust loan growth — which clocked in at 19% in June — alongside higher public spending on infrastructure and the tax reform program which could push prices upward, enough to warrant the BSP’s intervention.

“Taken together, these factors inform our forecast for inflation to rise to 4.0% by the end of 2017,” the research unit added.

Introducing higher interest rates could likewise ease further capital outflows, as investors would not have to flee to other markets as margins in the Philippines pick up as global interest rates trend higher. Otherwise, foreign funds will likely head for the exit.

“While the BSP could certainly keep rates low to facilitate the government’s expansionary fiscal plans, this would risk further capital outflows and jeopardise macroeconomic stability,” BMI Research said.

Mr. Espenilla has said that the central bank would not have to move in sync with the Federal Reserve even after the two rate hikes introduced by the US central bank during the first half of 2017, noting that domestic inflation and other local indicators remain to be their biggest concern more than global developments.

He also said the recent weakness of the peso should not be a cause of alarm, as the BSP remains armed with enough buffers to prevent a “free fall.”

On Monday, analysts at ANZ Research said “intensifying” imbalances in the economy, particularly the robust pickup in bank lending and the widening gap in external trade, have been weighing on the exchange rate, which may be addressed through monetary policy tweaks.