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MANILA, Philippines - DBS Bank Ltd. said the dovish policy stance of the Bangko Sentral ng Pilipinas (BSP) is nearing an end amid rising inflation and recovering oil prices in the world market.

In its latest insight titled "Philippine Bonds are still expensive," DBS said the accommodative monetary policy by BSP is nearing an end with inflation and oil prices edging up.

DBS sees inflation averaging 1.6 percent this year and 2.6 percent next year as the distortion from low oil prices dissipates going into 2017.

The investment bank said growth has been robust in recent years with limited inflation. The expansion was achieved against a favorable backdrop of global disinflation and falling oil prices.

Inflation kicked up to an 18-month high of 2.3 percent in September from 1.8 percent in August due to faster rise in food and non-food prices. This brought the average inflation to 1.6 percent in the first nine months of the year, still below the BSP’s two to four percent target.

Not only has underlying demand remained strong, DBS said inflation expectations have inched up in recent months alongside the rise in food prices.

The investment bank said the BSP is likely to impose two 25-basis point rate hikes early next year.

"Coupled with the anticipated upward pressure from global rates, the higher inflation trajectory is likely to prompt the BSP to tighten its policy stance," it said.

According to DBS, the BSP has been scaling up the volume of the term deposit facility (TDF) to P110 billion this month from only P30 billion when it was launched last June 8 as there is ample liquidity in the financial system.

The country's gross domestic product (GDP) growth accelerated to seven percent in the second quarter from 6.8 percent in the first quarter amid strong boost from election related spending.

This brought the GDP expansion to 6.9 percent in the first half, toward the higher end of the six to seven percent target penned by economic managers.

Robust domestic demand and the benign inflation environment have allowed the BSP to keep an accommodative monetary policy since September 2014.

Last June 3, the BSP adopted an operational adjustment slashing the overnight lending rate to 3.5 percent, the overnight reverse repurchase rate to three percent, and the overnight deposit rate to 2.5 percent.

DBS also added Philippine government bonds are still expensive as both two- and 10-year yields have drifted higher since September.

"Domestic and external conditions have become unfavorable for bonds. Moreover, the trade balance has deteriorated while the global environment has become less supportive of bonds," DBS said.