Banks see steady BSP policy rates

MANILA, Philippines – The Hongkong and Shanghai Banking Corp. as well as the Australia and New Zealand Banking Group see the Bangko Sentral ng Pilipinas (BSP) keeping key policy rates on hold this year.

Joseph Incalcaterra, economist at HSBC, said authorities are likely to keep the country’s monetary stance unchanged for the rest of the year. 

“We expect the BSP to keep the current monetary policy settings on hold,” he said.

Incalcaterra pointed out the shift to the interest rate corridor (IRC) framework actually resulted in a loosening of conditions in the short term, given the reduction of the policy rate and the limited volume of the term deposit facility.

Banks and trust entities continue to swarm the once a week auction of seven- and 28-day term deposits, prompting the BSP to increase the volume of the term deposit facility (TDF) to P50 billion starting this month from P30 billion in June.

Both tenors fetched 2.50 percent during the auction last July 7.

“This should be resolved as the volume of the term deposit facility increases over time,” Incalcaterra said.

The BSP hopes the term deposit rate will move towards the policy rate of three percent.

“This will result to better link money market activity to the policy rate, thus improving the transmission mechanism of monetary policy in the Philippines,” the HSBC economist said.

HSBC earlier upgraded the country’s gross domestic product (GDP) growth rate forecasts to 6.3 percent for this year and next year. This was higher than the previous projection of 5.9 percent for 2016 and 5.8 percent for 2017 amid the renewed optimism under the Duterte administration.

The country’s GDP growth accelerated to 6.9 percent in the first quarter of the year from the revised 6.5 percent in the fourth quarter of last year due to robust domestic demand and higher government spending.

The economic managers of President Rodrigo Duterte have pencilled a lower GDP growth target of between six and seven percent instead of the previous range of 6.8-7.8 percent.

On the other hand, ANZ Bank economist Eugenia Fabon Victorino said there was little risk that inflation would breach the two to four percent target set by the BSP.

“Although the central bank’s target is the annual average of headline inflation, we still expect BSP to remain on hold through 2016,” she said.

Victorino pointed out monetary authorities could start raising rates in the first half of next year with the normalization of interest rates by the US Federal Reserve.

“We have pushed back our call of policy tightening to the first half of 2017 on the back of increased likelihood of delays in further Fed rate normalization,” she added.

Inflation kicked up to a 14 month high of 1.9 percent in June from 1.6 percent in May primarily due to higher food prices.

Victorino said the country’s agriculture sector would remain the weak link as it likely contracted in the second quarter due to the impact of El Niño.

“Food inflation is gaining momentum on the back of double-digit growth in the vegetable sub-index. The ample stockpile of imported rice has kept rice prices well-behaved, overshadowing the upside risks to locally-produced food items,” she said.

Food accounts for 39 percent of the consumer price index basket.

She warned the continued rise in food inflation would likely resurface as oil prices gain traction.

Last June 23, the BSP’s Monetary Board kept interest rates unchanged amid a manageable inflation environment and firm domestic economic activity.

The BSP has kept its policy stance unchanged for 14 straight rate-setting meetings since October 2014.

The decision came amid the assumption of office by President Duterte as well as the volatile global financial markets due to the impending interest rate hike in the US as well as the decision of the United Kingdom to leave the European Union.