No more interest rate hike seen this year

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) will likely end moves to adjust interest rates this year, but is poised to continue raising rates by early 2015, a leading bank economist said.

JPMorgan, Chase Bank chief Asean economist Sin Beng Ong said the BSP would hike rates just once in mid-2015. 

“Thus (the BSP) has taken out the two overnight reverse repo (RR) hikes that were penciled in for fourth quarter this year and first semester of 2015,” Sin added.

The BSP tightening this year has been symmetric. There have been two 100 basis points (bps) RR hikes, two 25 bps special deposit accounts (SDA) rate hikes, and two 25 bps policy rate hikes.

With food inflation easing in September and global commodity prices having eased recently, the inflation trajectory in 2015 has been revised down and the forecast trajectory now sits at the mid-point rather than the upper end of the two- to four-percent BSP inflation target for 2015.

This thus reduces the need for the BSP to signal its concerns over inflationary risks, Sin said.

The economist said only one rate hike expected in mid-2015, taking other two prior hikes out. The currently low level of onshore peso rates against the dollar rates remains a risk that could catalyze currency substitution.

“We see the BSP hiking its overnight reverse repo and SDA rate by 25 bps in mid-2015 following the anticipated hike in the (US) Fed funds rate to maintain rate differentials,” he added.

The nine-percent growth in July exports Asia’s fastest. Net exports also contributed to first semester’ six-percent gross domestic product (GDP) growth.

The International Monetary Fund retained its 6.2-percent GDP growth forecast for 2014 but cut its 2015 forecast to 6.3 percent from 6.4 percent.

JPMorgan said the revised inflation forecast now pencils in year average inflation of 2.4-2.9 percent in 2015 from 3.7 percent previously, and a peak inflation of 3.4 percent in the first quarter of 2015 rather than the four percent in the prior and below the two to four percent inflation target range for next year.

Other prices have been benign, other than food and fuel prices.

Food inflation slid to 7.4 percent in September 2014 from 8.3 percent the previous month.

Lower price increases in rice (10.7 percent from 13.2 percent), corn (8.3 percent from 9.1 percent) and vegetables (9.8 percent from 15 percent) backed this slowdown.

Benchmark Dubai crude oil’s price also declined, which pulled down local petroleum prices in September 2014. The generation charge of Manila Electric Co. (Meralco) rose by only 0.4 percent in September 2014.

Financial stability and rate differentials are expected to catalyze rate decision in mid-2015.

Sin said the US is expected to hike its policy rate starting in the second quarter next year, the risk is that outflows in the capital account could continue, especially amid low domestic rate differentials between the dollar and peso deposits.

And with changes in currency expectations, these have likely been contributing factors leading to the recent rise in domestic foreign currency deposits since late 2013.