SINGAPORE banking giant DBS has revised its earlier forecast of an interest rate hike later in the year by the Bangko Sentral ng Pilipinas (BSP), and now sees a rate hike coming in early 2016, the bank said in a research note published on Friday.
“Following the surprise rate cuts in Thailand and South Korea this week, markets are guessing at who is next to cut in the region,” the bank said.
DBS said the Philippines is one obvious candidate to this scenario given that the country’s headline inflation rate has been falling in recent months, while the peso is now the best performing Asian currency against the dollar year-to-date.
However, soft inflation and steady economic growth above 6 percent this year make it highly unlikely to see the BSP trimming its rates, it pointed out.
As for the prospects of an interest rate hike DBS said, “We have previously penciled in a 25 basis points rate hike in the fourth quarter of 2015. This is likely to be delayed until early 2016,” because the BSP is unlikely to make a sharp turn in its policy trajectory.
“Expect the overnight borrowing rate to remain steady at 4 percent for the rest of the year,” the bank added.
In terms of the local currency, DBS said the peso would continue to be supported by robust foreign direct investments and remittance inflows.
Foreign direct investment (FDI) reached a record-high of $6.2 billion in 2014, while foreign remittances also recorded a record-high $24.3 billion last year.
As a consequence of these strong flows, one of the main concerns of the BSP is still the growth in money supply, DBS said.
DBS said that the government is on an expansionary mode, ahead of the presidential election next year.
The expansionary mode will only put more upward pressure on overall loan growth, which is still running near historical highs of about 20 percent currently, it said.
“Indeed, we would not be surprised if the BSP may even tinker with the rates on its Special Deposit Account (SDA) going forward to balance risks stemming from the fiscal expansion,” it concluded.
The rate for the SDA currently stands at 2.50 percent.