3 international banks see BSP maintaining rates

MANILA, Philippines - Three foreign investment banks see the Bangko Sentral ng Pilipinas (BSP) keeping its interest rates steady until the end of the year on the back of the lower-than-expected economic growth in the first half of the year as well as the benign inflation outlook.

Zurich-based Credit Suisse, British banking giant Hong Kong and Shanghai Banking Corp. (HSBC), and London-based Barclay Capital believe that the BSP would keep the overnight borrowing rate at 4.50 percent and the overnight lending rate at 6.50 percent until the end of the year.

In a paper, Credit Suisse vice president for India and Southeast Asia economics Devika Mehndiratta said that monetary authorities would likely keep policy rates steady this year as inflation is not expected to move up to worrying high levels.

“We think inflation is likely to edge up a bit, but not worryingly so. BSP is likely to keep rates on hold for the rest of 2011,” Mehndiratta stressed.

However, the official pointed out that the BSP would raise interest rates by 25 basis points early next year as domestic rice prices may move up with a lag in response to the recent surge in global rice prices and there are pending upward adjustments to some transport fares with the removal of subsidies for MRT-LRT fares and imposition of a 12-percent value added tax (VAT) on toll.

It added that the BSP would likely keep the reserve requirement ratio for banks at 21 percent because the threshold is now high by regional standards.

HSBC also believes that the BSP would keep interest rates steady until the end of the first quarter of next year but could still raise further the reserve requirement ratio for banks over the near term if liquidity pressures do not ease sufficiently.

“While rates are likely to stay on hold well into 2012, the BSP may hike the RRR further to tighten liquidity conditions,” HSBC said.

The investment bank added that the BSP is not turning a blind eye to the ample liquidity sloshing around the system that continues to boost credit growth and ultimately could keep inflation pressures simmering.

“While the BSP is still on inflation watch, the dovish tone of the policy statement suggest that inflation concerns are no longer keeping them awake at night, twisting and turning,” it said.

On the other hand, Barclay Capital economist Prakriti Sofat said in a study entitled “Philippines: BSP cautious, rates on pause into 2012” that the BSP would keep interest rates steady this year due to manageable inflation and subdued economic outlook.

“Our view remains that the central bank will keep the rates unchanged through 2011 and into next year,” Sofat stressed.

She pointed out that Barclays expect inflation to average at 4.5 percent this year and 3.5 percent next year.

The BSP left key interest rates unchanged for the third consecutive policy rate-setting meeting last September 8 on the back of the lower- than-expected economic growth in the second quarter of the year as well as the benign inflation outlook amid stable oil and food prices in the world market.

The body also decided to maintain the reserve requirement ratio for banks at 21 percent.

“The Monetary Board’s decision is based on its assessment that current monetary policy settings remain appropriate given a manageable inflation environment and subdued economic outlook,” he stressed.

The BSP raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid the escalating price of oil in the world market.

The policy rate setting body, however, kept interest rates steady last June 16 and July 28 but raised the reserve requirement ratio for banks by a cumulative 200 basis points to 21 percent from 19 percent to siphon off P70 billion from the financial system and curb additional inflationary pressures arising from excess liquidity brought about by strong inflow of foreign capital.

The BSP slashed the reserve requirement for banks to 19 percent from 21 percent in November of 2008 as part of the package of liquidity-enhancing measures aimed at releasing more liquidity into the financial system to boost economic activity and cushion the impact of the global financial crisis on the domestic economy.

Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend. Required reserves consist of two forms: regular or statutory reserves and liquidity reserves.