DBS sees BSP tweaking rates if GDP slide continues

MANILA, Philippines – DBS Bank Ltd. of Singapore said the Bangko Sentral ng Pilipinas (BSP) would only tweak its monetary policy settings if the country’s gross domestic product (GDP) growth falls below five percent.

In a research note, DBS said the BSP is not in a hurry to cut interest rates as the country’s inflation eased to a new record low of 0.6 percent in August from 0.8 percent in July.

Monetary authorities, the Singaporean bank said, is not likely to adjust interest rates even if the country’s gross domestic product (GDP) growth slowed down to 5.3 percent in the first half of the year from 6.4 percent in the same period last year due to weak global demand and lack of government spending.

“Cutting interest rates is clearly an option, although we don’t think the BSP is ready to do just that. Unless GDP growth were to fall below five percent, the authorities are unlikely to feel the need to provide any stimulus for now,” DBS said.

The investment bank earlier slashed the country’s 2015 GDP growth forecast to 5.7 percent instead of six percent even if the expansion accelerated to 5.6 percent in the second quarter from the revised five percent in the first quarter of the year.

Likewise, DBS explained the BSP is no longer in a rush to tighten its policy stance as loan growth has moderated to 13 percent year-on-year from a year-ago expansion of 20 percent.

The BSP has kept key policy rates unchanged since September last year leaving the overnight borrowing rate at four percent and the overnight lending rate at six percent.

“Policy rates may remain at four percent for longer than previously expected,” the bank said.

DBS sees inflation picking up toward the end of the year and in 2016 as a result of uncertainties in food prices due to the prolonged El Niño in the country.

“Some risks remain, especially with uncertainties over food prices going into 2016 due to the prolonged drought in the region. Still, BSP is unlikely to take this low inflation lightly, especially since core inflation is also likely to average around two percent for the year, which will be a record-low,” it said.

Latest forecast from the BSP showed inflation hitting 1.9 percent this year or slightly below the central bank’s target of two to four percent due to stable food prices and declining price of oil in the world market.

DBS said Philippine market rates have stayed relatively stable through market volatility over the past two months with the 10-year government bond yields largely hovering within a narrow range of 4.2 percent to 4.4 percent since mid-May.

“Market gyrations triggered by a renewed fall in commodity prices and exacerbated by concerns about the Chinese economy did little to dampen demand for government bonds,” DBS said.

The 10-year bonds yielded lower average in August compared to June and July. in contrast to the performance of government bonds in other economies of the Association of Southeast Asian Nations (Asean).

“With external funding risk largely not a concern, weakening growth inflation dynamics are the key reasons why Philippine government bond yields have been held down,” DBS said.