Strong growth, benign inflation BSP likely to keep rates steady

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) may keep policy rates steady this week as inflation remained benign and growth strong, two investment banks said.

Singapore-based DBS Ltd. and Dutch financial giant ING Bank said the central bank is unlikely to touch any of its three rates on June 23 under its newly-instituted interest rate corridor (IRC).

Last June 3, BSP adjusted key policy rates as part of the shift to the IRC framework, putting them at 3.5 percent, three percent and 2.5 percent, to create a corridor.

The rates represent overnight lending, borrowing and deposit facilities, respectively.

With inflation down and IRC just starting, DBS economist Gundy Cahyadi said BSP policy-making Monetary Board may not start raising rates until early next year when consumer price increase is likely to pick up.

“The domestic economy is likely to remain robust and this will embolden the BSP to tighten its monetary policy,” Cahyadi said.

“Looking further ahead, we reckon that the risk for a rate hike is still greater than that for a cut. For now, we expect the BSP to raise rates in early-2017,” he said.

Inflation kicked up to 1.6 percent in May from 1.1 percent the previous month due to higher pump prices. This, as economic growth accelerated to 6.9 percent in the first quarter.

The government has set a two- to four-percent inflation target this year and the next. Growth, as measured by gross domestic product (GDP), is targeted between 6.8 and 7.8 percent.

Cahyadi said BSP would closely monitor bank lending, which grew 15.6 percent in April, to ensure credit is just enough, not excessive, to support the economy.

“As loan growth starts to pick up again, BSP is likely to start watching for any overheating risks once again. This is particularly important, given that investment growth has run up significantly since the fourth quarter last year,” he said.

Joey Cuyegkeng, senior economist at ING Bank Manila, agreed with Cahyadi on higher inflation next year. He forecast consumer prices to rise three percent then.

Higher government spending, he said, could drive inflation to trend to above two percent this year from 1.4 percent last year.

“We estimated that the increase in deficit spending to three percent of GDP would entail around P150 billion more in government financing needs for 2017,” Cuyegkeng said.

“Domestic liquidity remains high while the cash position of government is expected to remain strong in the near term,” he said.

BSP has kept interest rates unchanged for 13 straight scheduled policy-setting meetings since October 2014 due to robust domestic demand and the benign inflation environment.