BSP seen keeping rates steady this week

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is likely to keep key rates steady when it revisits policy settings on Thursday, UK-based investment bank Barclays said.

“With inflation moving lower and the peso getting stronger, we believe the BSP will leave policy rates unchanged,” the bank said in its latest Emerging Markets Weekly report.

Inflation has slowed down in June to 4.4 percent after hitting a 30-month high in May as increasing food prices were tempered by the lower rise in housing and utility rates.

In the six months to June, the rate has averaged 4.2 percent, above the midpoint of the BSP’s three to five percent target range. The central bank, however, stressed earlier this month that inflation expectations remain within target.

The peso, meanwhile, has averaged 43.82 per dollar in June, stronger than the 43.92 average in May and 44.64 in April.

But Barclays said it sees the BSP adjusting the interest rate on the Special Deposit Account (SDA) facility to keep the inflation path from breaching the target range.

“[BSP] will hike SDA rates by 25 bps (basis points) to anchor inflation expectations further,” the bank said.

Monetary authorities, during its last policy meeting on June 19, already raised the SDA rate by 25 bps to 2.25 percent in order to rein in relatively high liquidity growth.

The SDA facility was introduced by the central bank in 1998 as a tool to mop up excess liquidity in the system. But the low interest rate environment that persisted following the global financial crisis enticed investors to park their funds in the facility instead of putting them in other financial instruments.

This then prompted the BSP to reduce the SDA rate by 150 bps last year and restrict the investments of investment management accounts in the facility to flush out funds.

The scenario pushed M3 growth – the broadest measure of liquidity – above 30 percent in July 2013. The rate only slid below 30 percent for the first time in 10 months in May at 28.4 percent.

Earlier this year, the BSP implemented a total of two percentage point hike in the banks’ reserve requirement ratio, also meant to pull down liquidity growth.

The Monetary Board revisits policy settings every six weeks. The next rate-setting meeting has been slated for July 31.