Recent rhetoric from policymakers suggest that tightening isunlikely this year. We push out our rate hike expectations to1Q18 and 2Q18.    We had penciled in a 25bps hike each in 3Q17 and 4Q17, but are now pushing itout to 1Q18 and 2Q18 given recent rhetoric from policymakers. The currency hasbeen under pressure with the current account balance and overall balance-ofpaymentsfalling into deficit amid easy fiscal policy and PHP has underperformedother AxJ currencies. In this context, Philippines' foreign reserves accumulationhas been more subdued compared to other Asian economies. However, recentcomments by policymakers suggest that they are not overly concerned aboutrecent currency trends, thereby limiting the likelihood of rate hikes in the nearterm.    Moreover, policymakers have commented that they will act if the economyis showing signs of overheating but they believe that the economy is not thereyet. Policymakers expect inflation, fiscal balance and current account balance toremain manageable.    We see a gap between what BSP would do (delay rate hikes for now) vs whatwe think they should do (pre-emptive tightening)…: At this stage, we agree thatit's difficult to argue the economy is in overheated territory. Overall indebtednessremains low despite strong credit growth. Despite moving into negative territory,the current account deficit is very mild and is funded by rising FDI on the otherside. Meanwhile, the fact that the savings-investment gap is caused by higherinvestment more so than higher consumption also mitigates the likelihood ofresource misallocation.    …Recent macro trends suggest a need for pre-emptive tightening to lean againstthe wind: However that said, we believe a combination of a global synchronousrecovery, Philippines’ positive structural fundamentals and a still-accommodativefiscal policy stance, which is geared towards infrastructure, will likely continue tosupport Philippines’ growth. With credit growth likely to remain strong, thecurrent account balance hovering around 0% for 2017/2018 and the loan-todepositratio continuing to rise amid a still-accommodative fiscal policy, we thinka pre-emptive rate rise will provide a counterbalance to fiscal policy, preventmacrostability indicators from becoming over-stretched and enhance thelongevity of the growth cycle. In our view, the inflation impact from the firstphase of tax reforms, coupled with still-strong GDP growth momentum, couldlead to the potential emergence of demand-pull inflation pressures. We thinkthe latter would likely prompt some rate normalization in 1Q18 and 2Q18.

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