The research arm of the Fitch Group said the BSP's Monetary Board is seen raising its benchmark overnight repurchase rate by 25 basis points by end-2017 and by another 25 basis points in 2018.
BMI Research earlier expected the central bank to raise interest rates by 50 basis points this year alone.
"Although we continue to expect higher interest rates over the coming quarters as inflationary pressures mount and risks of capital outflows intensify, we have now revised our forecast for a 25-basis point hike this year and another 25 basis points in 2018," the research firm announced in its latest Philippine report.
Despite BSP Governor Nestor Espenilla Jr's assurance that they are not in a rush to tighten monetary policy, BMI Research said the central bank is likely to jack up policy rates.
"However, mounting inflationary pressures, risks of capital outflows, and potential for a wider-than-expected fiscal deficit should still see interest rates head higher over the coming quarters," BMI Research's note read.
During Espenilla's first rate-setting meeting as BSP chief and Monetary Board chairman last August 10, Espenilla announced the body decided to keep interest rates unchanged as domestic demand stood firm while inflation remained manageable. (READ: BSP maintains interest rates in Tetangco's final Monetary Board meeting)
Latest data released by the Philippine Statistics Authority (PSA) showed inflation climbed to 2.8% in July, from the revised 2.7% in June.
"We expect price pressures to continue to rise over the coming months for several reasons," BMI Research said.
It then cited that commodity and energy prices have "been on a broad upswing over the last two months and would continue to head higher in the coming months," as the price of oil in the world market is set to average $54 per barrel this year.
Furthermore, the credit growth of 18.4% in May would continue to outpace nominal gross domestic product (GDP) growth of around 8% to 10%.
BMI Research said the Build, Build, Build infrastructure program of President Rodrigo Duterte's administration as well as the implementation of the comprehensive tax reform program would further widen the country's fiscal deficit.
"Taken together, these factors inform our forecast for inflation to rise to 4% by the end of 2017," it said.
BMI Research added that the peso would "continue to be susceptible to further capital outflows" in times of rising global interest rates and risk aversion, due to a still-substantial external debt stock at 24% of GDP as of end-April 2017. – Rappler.com