The decision by the Philippines central bank to maintain its policy rate was widely anticipated, with the interest rate corridor (IRC) left at 2.50%, 3.00% and 3.50% since June 2016. Inflation remains manageable while the economy remains solid. The central bank’s inflation target is between 2% and 4% while our 2017 headline inflation projection is 3.3% – 3.0% for 2018. Although inflation averaged 3.2% for the first five months of the year, the battle is not over. Strong domestic demand, potential upward adjustments to transportation and electricity prices and implementation of proposed tax reforms could result in renewed pressures. Furthermore, credit growth remains strong. Our base remains as no change to the policy rate with a 45% chance for one rate hike in 2H2017 and a 30% chance for two rate hikes, each by 25bps. We are expecting the peso to average around 49–51, supported by remittance flows into the country, sound economic fundamentals, strong exports, healthy reserves, resilient inflow of foreign direct investment and also the USD which is expected to exhibit some late lethargic cycle movement due to limited progress on pro-growth policies.

• The decision by the Philippines central bank to maintain its policy rate was widely anticipated. The interest rate corridor (IRC) was left at 2.50%, 3.00% and 3.50% since June 2016. The decision comes following the view that inflation is manageable while the economy remains solid. The central bank’s inflation target is between 2% and 4%. Our 2017 headline inflation projection is 3.3% – 3.0% for 2018.

• Although inflation averaged 3.2% for the first five months of the year, the battle is not over. Strong domestic demand, potential upward adjustments to transportation and electricity prices and implementation of proposed tax reforms could result in renewed pressures.

• Furthermore, credit growth remains strong, averaging 18.5% y/y in the last three months. We found loans to the real estate and construction sectors jumped 18.8% y/y YTD despite a slowdown in these sectors.

• Our base is that the central bank will mostly likely maintain the current policy rate given that the inflation environment is within the tolerance level. Still, there is a 45% chance for the central to institute one rate hike in 2H2017 and a 30% chance for two rate hikes. We expect the rate hikes would be 25bps each time.

• We are expecting the peso to average around 49–51 where it will be supported by remittance flows into the country, sound economic fundamentals with GDP poised to settle at 6.5% in 2017, strong export growth in 2017 thus far, healthy net international reserves of US$82.2bil as of May 2017 and resilient inflow of foreign direct investment of US$509mil as of March 2017.

• Furthermore, the USD is expected to exhibit some late lethargic cycle movement due to limited progress on the US fiscal policy initiatives. A lack of clarity on tax reforms also reduces the probability of a further fiscal stimulus (infrastructure spending) which will spur growth.

Source: AmInvest Research - 23 Jun 2017