BSP seen keeping key rates steady
(The Philippine Star) - July 25, 2013 - 12:00am

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) would likely keep policy rates steady today and throughout the year as inflation is seen to behave amid concerns the world economy’s continued weakness could affect the Philippines, a global investment bank said in a report.

“The foremost consideration at the upcoming meeting is likely the economy,” HSBC Global Research said in a report yesterday.

The BSP’s policy-making Monetary Board meets for the fifth time this year to set policy. Key rates – which serve as banks’ benchmarks in pricing their loans – have been kept at record-lows of 3.5 percent and 5.5 percent since October last year.

“With uncertainty concerning China’s growth, the timing of the FOMC tapering, and the euro zone recovery fragile, the BSP has room to keep main policy rates low to boost domestic demand,” HSBC pointed out.

“We expect policy rates to be on hold for the rest of the year,” it added.

Based on HSBC’s estimates, the local economy could grow by 6.4 percent this year, faster than its original forecast of 5.9 percent. From April to June though, growth could have slowed from 7.8 percent in the first quarter.

“Disappointing” remittances growth in May, HSBC said, could have dragged private spending during the second quarter. This came side by side with continued weakness in exports and slowing credit growth.

Government data showed remittances from overseas Filipinos expanded by 5.3 percent in May, slower than April’s 6.1 percent. Merchandise exports, on the other hand, contracted 0.8 percent during the same period.

“Even with external demand likely to pick up towards year-end, thanks to a recovery from the US, Japan and China (contingent on government stepping in to help), the BSP will not take any chances and keep rates low,” HSBC explained.

With asset bubbles not yet a concern, the BSP could also support the economy by “forcing” special deposit account (SDA) funds “to flow elsewhere” by keeping its two-percent rate on hold for now.

Return in the SDA – banks’ and trust departments’ fixed-term deposits with the BSP— has been cut from 3.5 percent originally earlier this year and HSBC said the BSP is “unlikely to adjust the SDA rate further” until full effects of cuts have been felt.

“Coupled with its ease in the peso, the BSP is likely pleased with the results of its reducing of the SDA rate,” the bank said.

“The gradual decline of the amount parked in the SDA facility since February suggests that funds are beginning to flow out of the facility and the rate of outflow is expected to accelerate in the coming months,” HSBC explained.

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