Nomura flags rising 2018 lending rates

INFLATION could overshoot the central bank’s target range in 2018 on the back of higher taxes and rising global crude prices, which could prompt the monetary authority to raise rates by as many as four times next year, analysts at Nomura Global Research said.

Bank analysts said their fresh estimates showed that overall price increases for basic goods and services could average 4.3% next year, well above the 2-4% target band of the Bangko Sentral ng Pilipinas (BSP).

If realized, this would also pick up from the 3.2% average expected this 2017 and would beat the central bank’s 3.4% forecast for the year.

In giving their latest forecast, Nomura economists factored in a higher oil price assumption of $65 per barrel, higher taxes under the tax reform package being finalized by Congress and a “more positive” output gap for the domestic economy.

“[W]e expect the bigger focus for 2018 to be headline inflation surprising the central bank target to the upside,” the global bank said in its Dec. 7 Asia Economic Outlook report.

The beyond-target pace will likewise prompt the central bank to adjust policy settings, the global lender said.

“We think BSP will not be able to look through the risk of headline inflation breaching its target in 2018. As a result, we now expect BSP to hike its policy rate by a total 100bp (basis points) to 4.0% at a rate of one 25bp hike per quarter,” the report read.

The BSP has kept its monetary policy stance unchanged since September 2014 amid manageable inflation and firm domestic demand, except for procedural cuts introduced in June 2016 for the shift to an interest rate corridor system.

The central bank is scheduled to hold its eighth policy review on Dec. 14.

On the other hand, Nomura said growth will further pick up to 6.8% in 2018 coming from this year’s projected 6.7%, boosted by faster global growth and a recovery of electronics exports. Philippine gross domestic product (GDP) growth clocked 6.7% in 2017’s first three quarters against the government’s 6.5-7.5% full-year target. Nomura now expects fourth-quarter GDP growth at 7.0%, after the accelerating 6.4%, 6.7% and 6.9% in the first to third quarters, respectively.

“… [O]ur fundamental view is that India, Indonesia and the Philippines are Asia’s new rising stars. We nickname them Asia’s ‘tiger cubs,’ replacing Northeast Asia’s aging and debt-burdened tigers as the core of the region’s economic dynamism…” the report read.

Zeroing in on the Philippines, it added that “[f]or next year, despite a likely increase in political noise, we expect the government’s focus on reforms to remain strong, alongside its drive to raise infrastructure spending further, which will be boosted by the reconstruction in Mindanao following the prolonged anti-terrorism military operations in Marawi” that ended in October after five months of siege.

BSP Governor Nestor A. Espenilla, Jr. has said that the central bank remains well-equipped to shield the economy against various risks that could fuel volatility in financial markets, but noted that domestic considerations remain the biggest concern for the monetary authority.

He has constantly said that the BSP does not have to move in sync with the United States even as another rate hike is in the offing from the Federal Reserve in the Dec. 12-13 meeting of its Federal Open Market Committee. — Melissa Luz T. Lopez