The Philippines' robust economy in the first quarter will likely boost chances for a rise in interest rates on Thursday (10/05).

Strong Philippine Q1 Growth to Boost Case for Rate Hike

BY :ENRICO DELA CRUZ

MAY 10, 2018

Manila. The Philippines' robust economy in the first quarter will likely boost chances for a rise in interest rates on Thursday (10/05), the first increase in more than three years to curb cost pressures.

Gross domestic product data for the January-March quarter, expected to show the economy grew at a brisk pace, will be released hours ahead of the central bank's rate decision.

The Bangko Sentral ng Pilipinas (BSP), growing more concerned about rising inflation expectations after consumer prices accelerated in April, the highest in at least five-years, is widely expected to raise rates, a Reuters poll found.

Inflation is seen moving further away from the central bank's 2-4 percent target range due to rising oil prices and additional taxes on some commodities. The majority of economists polled by Reuters believe conditions are ripe for a rate hike.

"We expect the BSP to hike its policy rate by 25 bp [basis points] at its upcoming meeting to defend its inflation target and to keep inflation expectations anchored," said Noelan Arbis, economist at HSBC in Hong Kong.

Arbis' call was shared by 10 other economists in a Reuters poll of 12 respondents. The lone dissenter had penciled in no movement in rates on Thursday.

If economists are right, the Philippines would be the third central bank in Southeast Asia to tighten policy this year after Malaysia and Singapore. It has kept policy settings steady since a 25 basis point rate increase in September 2014.

Some economists forecast further rate rises later in the year, with at least one calling for two more rate increases after Thursday's expected move.

A rate increase could provide "temporary" support for the weak peso, said Chidu Narayanan, economist at Standard Chartered Bank in Singapore, as "the structural drivers of medium-term Philippine peso weakness remain intact."

The peso has dropped 4 percent since the start of the year.

President Rodrigo Duterte has pledged to usher in a golden age of infrastructure through a six-year, $180 billion spending spree to modernize and build airports, roads, railways and ports.

The so-called "Build, Build, Build" initiative has contributed to the peso's weakness as it has led to a surge in imports, which has widened the country's trade and current account deficits.

But the government's infrastructure push is being credited for the economy's stellar performance in the last few years.

The Philippines' $314 billion economy was forecast to have grown an annual 6.8 percent in the first quarter, faster than the 6.5 percent pace in the fourth quarter - marking its 77th quarter of uninterrupted growth.

On a quarter-on-quarter basis, GDP was estimated to have expanded a seasonally adjusted 1.5 percent, according to the median forecast of three analysts with quarterly estimates, in line with the previous quarter.

Central bank governor Nestor Espenilla said in March the economy was strong enough to absorb policy tightening if needed, noting that inflation expectations had started to rise.

Reuters

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