Second quarter growth seen steady, 3rd rate hike coming: Reuters poll

Enrico Dela Cruz, Reuters

Posted at Aug 07 2018 06:25 PM | Updated as of Aug 08 2018 08:33 AM

MANILA - The Philippine economy probably expanded at a slightly slower pace in the second quarter but that will not stop the central bank from hiking the key interest rate by up to 50 basis points on Thursday to contain mounting inflation, Reuters polls show.

Gross domestic product (GDP) likely rose 6.7 percent in the April-June quarter from a year earlier, according to the median of forecasts from 17 analysts. That would be only marginally less than the 6.8 percent clocked in the first quarter.

A healthy increase in government spending, rising foreign direct investment and gains in foreign exchange remittances should support the economy's momentum and allow for further policy tightening by the central bank, economists said.

The central bank looks certain to raise interest rates for the third time this year at its Aug. 9 meeting, after data on Tuesday showed annual inflation moved further above its 2-4 percent 2018 target range. 

Higher food and transport costs, and a weak peso, pushed July's annual inflation to 5.7 percent, the fastest pace in over five years and near the top end of the central bank's 5.1-5.8 percent forecast for the month. 

In a Reuters poll about the central bank decision due on Thursday, six hours after the GDP data is released, all 19 analysts predicted another rate increase. 

Twelve forecast a 50 basis point (bps) hike while the others predicted 25 bps, with some expecting further increases later. 

Some analysts changed the magnitude of their rate hike calls after the July inflation data came in above expectations. 

A 50 bps increase would bring the overnight borrowing rate to 4.0 percent. 

"Should price pressures continue to rise through the third quarter, the risk would be of further tightening at the September 27 meeting... and another 25 bp hike in the fourth quarter," Benjamin Shatil, ASEAN economist at JPMorgan, said in a note.

An increase on Thursday would make the Philippines the second regional central bank, after Indonesia, to hike at three consecutive meetings this year to seek to shore up a struggling currency. 

Like Indonesia, the Philippines is grappling with a widening current account deficit which adds more pressure on the currency already hit by higher U.S. rates and in jeopardy of more damage from the Sino-U.S. trade war.

The peso has lost 5.6 percent against the dollar this year, and has contributed to the increasing inflation rate, which could further hurt domestic consumption, the bedrock of the Philippine economy.

Manila is targeting economic growth of 7-8 percent this year, which is more optimistic than the 6.8 percent forecast of the Asian Development Bank and the International Monetary Fund's 6.7 percent projection.