BSP expected to raise key rates

MANILA, Philippines - Monetary authorities are likely to raise rates further as inflationary pressures are still high and June’s deceleration is primarily led by the slowdown of housing prices, a leading bank economist said.

In its latest global research, HSBC economist  Trinh Nguyen said at the July 31 meeting, the Bangko Sentral ng Pilipinas (BSP) will likely increase the main policy rate (reverse repurchase agreement) by 25 basis points, taking the rate to 3.75 percent.

Nguyen noted that headline inflation decelerated slightly on lower housing costs. But food prices remained elevated, reflecting supply-side constraints.

 “Excess liquidity is another concern; credit growth accelerated in May. The government will import more rice to mitigate supply shocks but food prices will remain high,” she said.

 “The central bank raised the special deposit account (SDA) by 25bps and the RRR by two percentage points to temper inflationary pressures. The respite from lower housing costs, however, is temporary and inflationary pressures will likely remain high,” she added.

The HSBC economist also said they expect the BSP to raise its main policy rates in July by 25bps, taking the benchmark rate to four percent by yearend.

According to Nguyen, June headline inflation decelerated to 4.4 percent year-on-year.

On a month-on-month basis, June inflation rose 0.4 percent month-on-month from 0.5 percent in May.

She noted that food inflation accelerated to 7.4 percent from 6.7 percent in May.

Core inflation decelerated to 2.8 percent in June from 3.1 percent in April.

Credit growth accelerated in May to 19.6 percent from 19.4 percent in April.

“Some negative supply shocks from Super Typhoon Yolanda are dissipating, including housing prices. Food prices, however, are still elevated and will continue to increase in the coming months,” she said.

Food inflation rose a staggering 7.4 percent in June. With the impact of the positive output gap still filtering through and food and energy prices expected to spike over the summer, headline inflation will approach the upper end of the BSP’s 2014 3-5 percent target range.

She said excess liquidity could pose as another “headache”.

 “M3 decelerated to 28.1 percent y-o-y in May from 32.1 percent in April, but still remains high. What’s more worrying is the acceleration of credit growth, which rose 19.6 percent in May from 19.4 percet in April, further stoking inflationary pressures,” she said.

 “The central bank will be lowering both the lower and upper ends of its inflation target in 2015, to a range of 2-4 percent (from 3-5 percent in 2014),” she noted.

She said, “We see this target being breached unless the BSP tightens monetary policy further to mop up liquidity and dampen demand.”

“We forecast headline inflation to average 4.2 percent in 2015. More worrying are long-term structural issues. Production, whether it’s food or electricity, is still short of what’s needed to keep up with rising demand. El Niño will likely exacerbate these supply constraints,” she said.

The Bangko Sentral ng Pilipinas (BSP) raised the SDA rate by 25bp to 2.25 percent in the previous meeting.

The central bank also increased the reserve requirement ratio (RRR) by 2ppt to 20 percent in the past meetings.