Foreign banks expect BSP to hike lending rates

MANILA, Philippines - Australia and New Zealand Banking Group Ltd. (ANZ Bank) and ING Bank said they expect the Bangko Sentral ng Pilipinas (BSP) to increase lending rates by another 25 basis points (bps) this month.

Both global financial institutions said the BSP would use either the special deposit account (SDA) or the reverse repo (RRR) for the hike in lending rates.

ING Bank Manila senior economist Joey Cuyegkeng said additional tightening of monetary policy is likely as core inflation for August has jumped and seems to be trending higher.

 “Inflation remains a concern. Ensuring that inflation would be within next year’s two to four-percent target range is a priority. Liquidity in the system remains high even as liquidity growth is slowing,” Cuyegkeng said yesterday.

 “We see upside risks to our 2014 and 2015 average inflation forecasts of 4.3 percent and 3.5 percent, respectively. We now see food inflation peaking in October, putting upward pressure on overall CPI readings over the next couple of months.”

ANZ Bank economist for ASEAN & Pacific Eugenia Fabon Victorino said upside risks remain looking forward to 2014 and 2015, with average inflation forecasts of 4.3 percent and 3.5 percent, respectively.

Food inflation is expected to peak in October, putting upward pressure on overall consumer price index (CPI) readings over the next couple of months. Utility companies are operating at almost full capacity.

Victorino said that the El Niño phenomenon in the fourth quarter would likely adversely affect energy production into 2015, exacerbating capacity constraints. Despite the rise in loans to the energy sector, the funds have been mostly used on repairs and not on investments.

“We continue to expect the SDA rate to rise by 25 bps to 2.5 percent on September. In view of the BSP’s 15-24 months of monetary policy transmission lag, we believe that the window to keep the SDA rate low has closed. The SDA facility remains the de facto policy rate in the Philippines with more than P1.2 trillion outstanding as of July,” she said.

Meanwhile, outstanding or overnight reverse repos priced on the policy rate have remained broadly unchanged for 16 months at around P300 billion.

ING Bank said the European central bank has cut policy rates and the launch of an asset-backed security purchases to provide significant liquidity in the euro zone over a period of time. This may partially offset the financial market impact of the normalization of US monetary policy.

“As US tightening starts and proceeds, US interest rates would have some impact on our financial markets - specifically peso and dollar bonds and indirectly our local currency bonds. Offsetting such actions may present a difficult balancing act for central banks including our BSP,” Cuyegkeng added.

Socioeconomic Planning Secretary Arsenio M. Balisacan said short-term interventions would focus on ensuring supply sufficiency of key commodities.

“Notwithstanding upward pressures on prices, the overall market expectations on inflation remain well-anchored,” he said in a statement.

The recent move to hike interest rates by 25 bps to 3.75 percent for the overnight borrowing or reverse repurchase facility and 5.75 percent for the overnight lending or repurchase facility has put a brake on potential price increases.

Core inflation, which excludes selected volatile food and energy prices, rose to 3.4 percent in August  from three percent in July  and 1.9 percent in August 2013.

But core inflation in the first eight months of 2014 remained subdued at three percent.

 “Year-to-date headline inflation rate stood at 4.4 percent, still within the Development Budget Coordination Committee’s (DBCC) inflation target of three to five percent for 2014,” the state economic manager said.