Philippines Q1 Economic Growth May Lead to Rising Interest Rates

The Philippines’ surging economy in the first quarter of the year would likely increase chances to rising interest rates; the first increase in more than three years to curb cost pressures.

The gross domestic product (GDP) for January-March will be released hours ahead of the central bank’s rate decision. The results are expected to show a vast rise in the growing economy of the Southeast Asian country.

Moreover, the country’s $314 billion economy was forecast to have grown an annual 6.8 percent in the first quarter. This was faster than the 6.5 percent in the last quarter of the previous year, which lead the country to its 77th quarter of steady growth.

On the other hand, economists believe that the current economic conditions and rise in commodity prices are ripe for a rate hike.

Noelan Arbies, an economist at HSBC in Hong Kong, stated that they expect the Philippine Central Bank (BSP) to hike its policy rate by 25 basis points (bp) at the upcoming meeting to defend its inflation target and to keep inflation expectations anchored.

If it happens, the Philippines would be the third country, after Malaysia and Singapore, to tighten its policy this year. The country kept its policy settings unchanged since a 25 basis point rate increase in September 2014.

Furthermore, the increase may support the Philippine peso temporarily, said Chidu Narayanan, an economist at Standard Chartered Bank in Singapore. He added that the structural drivers of medium-term peso weakness remain intact.

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

Inflation Rise, Government Programs

Infrastructure buildings in Pasig City, PhilippinesThe Philippines’ inflation rate may reach the central bank’s target, the International Monetary Fund (IMF) said.

“Inflation should remain within the target band, but the authorities will need to watch carefully for building inflation pressure, as well as rapid credit growth,” the IMF said in its latest Asia-Pacific regional economic outlook.

Last week, the government reported that inflation rose 4.5 percent year-on-year in April. It was its fastest pace in at least five years. The figure brought the year-to-date tally to 4.1 percent, overlapping the Philippine Central Bank’s 2-4 percent target range.

The IMF, under the rebased index, expects inflation to overshoot the central bank’s target to average 4.2 percent in 2018; and cooling down to 3.8 percent in 2019.

The “Build, Build, Build” program of Philippine president Rodrigo Duterte has contributed to the peso’s weakness. The program will be focusing on the modernization of the Philippines’ infrastructure sector.

The program has led to a rise in imports, which has widened the Philippines’ trade and current account deficits. However, the infrastructure projects contributed for the country’s stellar performance in the recent years.

Another is the administration’s law on tax reform. The reform lowers personal income taxes while rising excise levies on fuel and cigarettes. The IMF noted that inflation picked up “owing to the temporary effects of tax reform implementation and higher energy prices.” They referred to the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

The two, among others, contributed for the recent jump in prices of widely used goods and services.

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