BSP seen raising rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas is seen increasing key policy rates this month despite the slower-than-expected first quarter economic growth, two banks said in separate research notes.

Rahul Bajoria, economist at UK-based Barclays, said the central bank may finally raise its overnight borrowing and overnight lending rates on June 19 after keeping them steady in its first three policy meetings for the year.

“We think that BSP is increasingly preparing the ground to hike rates, with BSP Deputy

Governor Diwa Guinigundo indicating that the BSP will remain vigilant on growth risks, but output growth may still lead to price pressures, hence BSP needs to keep an eye on liquidity growth and capacity utilization,” Bajoria said.

“BSP has also said that appropriate action will be taken to ensure that inflation remains within its policy band,” he continued.

Philippine economic growth slowed to 5.7 percent in the first quarter from 7.7 percent in the same period last year.

The BSP’s policy-making Monetary Board has kept key rates steady amid expectations of inflation remaining within its three to five percent target this year, and within the two to four percent range in 2015. However, it has hiked the reserve requirement ratio of banks by a total of two percent in its last two meetings to mop up excess liquidity in the system.

“We expect BSP to hike policy rates by 50 basis points by end of 2014, with the first hike likely in June policy meeting,” Bajoria said.

He added the bank also expects further one-percent hike in the reserve requirement ratio by year end.

But Singapore-based DBS Bank said the central bank may put off hiking key policy rates in the second half of the year. The Monetary Board’s next rate-setting after this month is slated for July 31.

“As far as policies are concerned, we think that the authorities may in fact prefer some moderation in growth, to prevent overheating risks in the medium-term. A six-to-seven percent GDP growth remains almost a certainty for 2014, despite the disappointing 1Q print,” DBS said.

“On the fiscal front, the focus is still on infrastructure development… (while) on the monetary front, the BSP is likely to start normalizing its policy rate in 2H14 (second half), and we continue to pencil in two 25-bps rate hikes,” the bank added.