MANILA - The Bangko Sentral ng Pilipinas (BSP) would resume lifting its key interest rates again next year on the back of slowing inflation and improving domestic output, according to UBS.

In its latest report, the Swiss-owned investment bank said the BSP is likely to keep its rates steady for the rest of the year before raising these by 50 basis points in 2010.

"Inflation expectations for the Philippines are currently very low and still falling, but probably more hostage than most to commodity price movements. Again, we see no need for policy rate increases on these criteria during 2009," said UBS economist Edward Teather.

The central bank has cut its benchmark rates by a total of 200 basis points in a rate-easing cycle that began in December to soften the blow of the global recession on the local economy. The rate cuts were meant to encourage banks to lower their lending rates to help spur consumption and business investments.

However, it decided to pause on the cuts in its August 20 meeting, saying its current rates of 4.0% for overnight borrowing and 6.0% for overnight lending were appropriate.

Teather said a "modest normalization" of policy rates, presently at record lows, could take place if inflation expectations happen in line with the BSP's policy target in 2010.

"We project a 50 basis point increase in policy rates in 2010, with the first move occurring in second quarter of 2010. Following this move, policy rates will still be very low in a historical context," he said.

The government earlier reported that commodity prices eased to a 22-year low of 0.1% in August from 0.2% in July, bringing the average inflation rate for the first 8 months of the year to 3.7%. This is well within the central bank's full-year inflation target of 2.5-4.5%.