Low interest rates seen to persist up to next year

MANILA, Philippines - Historic low interest rates could persist until next year, but the Bangko Sentral ng Pilipinas (BSP) is not likely to trim them anew, according to two  investment banks.  

British banking giant HSBC and Singapore-based DBS Group, in separate research notes, said policy rates could stay at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending until next year.

This was after the BSP decided to maintain them last Thursday, its last policy meeting for the year. Lower rates are expected to translate to more bank loans which should drive consumption and investment higher.

“Still-high domestic demand and an unfavorable base effect could push headline inflation higher. As such, we expect no more easing, although rates will likely stay low until (fourth quarter of 2013),” HSBC economist Trinh Nguyen said.

The “easing cycle ended in October,” she said, and that strong growth momentum driven by high demand could push consumer prices up next year, thus, putting BSP on guard. 

Citing favorable growth and inflation prospects, the central bank slashed policy rates by 25 basis points each during its meetings last January, March, July and October.

Economic expansion hit 7.1 percent in the third quarter, beating market expectations, and bringing year-to-date growth to 6.5 percent. Despite this, inflation has remained manageable at 3.2 percent as of November.

Average growth this year has so far surpassed the government’s five to six-percent target, while inflation has remained at the low-end of the BSP’s three to five-percent goal.

“What’s really noteworthy also is how bullish monetary officials are about the growth momentum of the country into next year. They expect liquidity and bank lending to continue to support growth,” Nguyen said.

For his part, DBS economist Eugene Leow said worries have so far been centered on capital inflows, and that recent BSP statements point to macroprudential measures as tools to contain them.

 “The BSP appears to be more concerned about excessive capital inflows and the peso strength. This also implies that rate hikes are not likely in the near term,” Leow said. A strong peso trims dollar export earnings and remittances from overseas Filipinos.

“Instead, macroprudential measures on NDFs or setting of a minimum holding period for local assets may be forthcoming,” he added.

BSP officials have been quoted as saying that they are considering putting a cap on non-deliverable forwards (NDF) transactions allowed for the whole banking industry. The cap will be in total value granted for these short-term contracts used for hedging against volatile currency movements. BSP believes NDFs are prone to speculative investors causing peso to appreciate too much.

Both Nguyen and Leow said inflation could rise in 2013, higher than BSP’s forecast of 3.1 percent. For HSBC, inflation could settle at 3.9 percent, while DBS had a faster outlook of 4.1 percent.

 “The BSP may undertake steps to mop up excess liquidity but monetary conditions are still going to remain supportive of loan growth through 2013,” Leow said. Bank lending rose 15.8 percent as of October, data showed.

Nguyen, on the other hand, warned record-low rates will only stay “as long as headline inflation stays within target.” Supply chain disruptions and oil price shocks are still possible next year, she said.