The central bank in the recent meeting left its policy rate unchanged, a decision which fell in line with ours and the market. The policy rates were held steady by holding the interest rate corridor (IRC) at 2.50%, 3.00%, and 3.50%. The central bank acknowledged the potential inflationary pressure which we believe is getting clearer, driven by adjustments to transport prices, pending tax reform and strong credit growth.

We expect the economy to maintain a robust growth supported by improving labour market, solid remittance inflows that will continue to underpin household spending while public infrastructure programme should gain traction and support capital spending. But the upside to growth will be limited due to some exposure on issues like the weaker peso which is licking into the costs of imports, a slowdown in FDI and portfolio investments due to the US Fed’s tightening cycle and internal security concerns.

We project the 2018 and 2019 GDP to grow around 6.5% while our inflation forecast is 3.2% for 2018 and 3.4% for 2018. Hence, we maintain our view that the central bank should raise its policy rate by 25 basis points (bps) in 1Q2018. For the full year of 2018, we foresee room for the rates to increase by a cumulative amount of around 50- 75bps. Our USD/PHP 2017 full-year average projection is around 50.56 with the year-end target at 51.80 and we expect the peso to weaken against the USD in 2018, averaging at 52.87 with an end period of 53.30.

• The Bangko Sentral ng Pilipinas (BSP) in the recent meeting left its policy rate unchanged, a decision which fell in line with ours and the market. The BSP kept its policy tools steady by holding the interest rate corridor (IRC) at 2.50%, 3.00%, and 3.50%. We noticed that the central bank has maintained its accommodative stance by keeping at the lower end of the corridor at 2.50% since September 2014.

• Meanwhile, the central bank acknowledged the potential inflationary pressure which we believe is getting clearer. Adjustments to transport prices and the pending tax reform will add to inflation. Besides, the credit growth is also rising at a fast pace since end-2011.

• We expect the economy to maintain a robust growth, with improving labour market and solid remittance inflows which will continue to support household spending. We believe the public infrastructure program should gain traction and support capital spending.

• Still there are some vulnerabilities that have emerged. For instance, while solid global demand resulted to a reduced trade deficit in the January to August period, the weaker peso is licking into the costs of imports. Both the FDI and portfolio investments are less attractive partly due to the US Fed’s tightening cycle and internal security concerns.

• We project the 2018 and 2019 GDP to grow around 6.5% while our inflation forecast is 3.2% for 2018 and 3.4% for 2018. Hence, we maintain our view that the central bank should raise its policy rate by 25 basis points (bps) in 1Q2018. For the full year of 2018, we foresee room for the rates to increase by a cumulative amount of around 50-75bps.

• Our USD/PHP 2017 full-year average projection is around 50.56 with the year-end target at 51.80. We expect pressure on peso to remain in 2018 against the USD as much will be influenced by the US Fed’s tightening cycle and internal security concerns which is likely to influence the FDI and portfolio investments. Our USD/PHP 2018 full-year average projection is around 52.87 with an end period of 53.30

Source: AmInvest Research - 13 Nov 2017