Foreign banks see no change in Philippine rates

MANILA, Philippines - DBS Bank Ltd of Singapore and the Australia New Zealand Banking Group Ltd expect the Bangko Sentral ng Pilipinas (BSP) to likely leave interest rates unchanged on Thursday.

Gundy Cahyadi, an economist at DBS, said the Philippine central bank is set to keep policy rates steady amid the benign inflation environment as the consumer price index eased to 1.8 percent in August from 1.9 percent in July.

“No reason why the BSP should act for now,” he said.

According to him, core inflation picked up to its highest year-to-date level of two percent in August after bottoming out in the second quarter. 

“Not only has underlying demand remained strong, but price expectations also seem to have inched up in recent months alongside the rise in food prices,” he added.

Cahyadi pointed out food inflation is currently trending around three percent, offsetting some of the drag prevalent in the housing or utilities and transport components of the consumer price index. 

The economist said inflation is likely to accelerate to 2.6 percent next year from 1.6 percent this year as the distortion from low oil prices is likely to dissipate going into 2017. 

Core inflation is also set to be steady within the 2.5 to three percent range by the mid-year. 

He said the BSP would want to continue draining excess liquidity from the financial system as investments continued to book a double-digit growth while loans continue to expand by 15 percent. 

To do this, Cahyadi explained the BSP would likely raise the volume of seven and 28-day term deposits being offered in the once weekly auction at the term deposit facility (TDF). 

Once short-term rates are closer to the policy rates as aimed under the interest rate corridor (IRC) system, monetary authorities could adjust the overnight deposit rate to 3.5 percent by the middle of 2017, Pinol said.

 External shocks could come from the impending interest rate increase by the US Federal Reserve. 

 “Expect the monetary policy bias to turn increasingly hawkish going into 2017 [especially when we also expect the Fed to play catch-up in adjusting its rates],” he added. 

For her part, ANZ Bank economist Eugenia Victorino said inflation would likely average 1.9 percent this year before rising to three percent next year.

The BSP has set an inflation target of between two and four percent starting this year until 2018. 

“We reiterate our view that the BSP is likely to maintain its policy tools through the second quarter of 2017,” she said. 

According to Victorino, the BSP should adjust the weekly auction size of the TDFs further before it emerges as the main liquidity management tool of the central bank.  

“Until then, we see limited room for the BSP to adjust its policy stance and lower its reserve requirement ratio,” she said.