BSP seen to keep key rates steady

MANILA, Philippines - The Bangko Sentral ng Pilipinas is expected to keep key policy rates steady when it meets this week as inflation continues on its decelerating trend, UK-based investment bank Barclays said in a report.

“With declining oil prices and softer growth in Q3 (third quarter), we expect the BSP to stand pat,” the bank said.

Latest data showed inflation further eased to 3.7 percent in November from 4.3 percent in October and 4.4 percent in September on lower increases of petroleum pump prices and the cost of food.

The rate has averaged 4.3 percent in the 11 months to November, above the midpoint of the central bank’s three to five percent target range.

Economic growth, meanwhile, decelerated to 5.3 percent in the third quarter from six percent in the second quarter and 5.6 percent in the first three months of the year. The nine-month average of 5.6 percent is way below the government’s full-year goal of a 6.5 to 7.5 percent expansion.

Monetary authorities in October left the overnight borrowing and overnight lending rates unchanged as inflation expectations fell within the targets for this year until 2016. Earlier, the BSP hiked key policy rates by a total of 50 basis points to ensure inflation would be within the goals.

The next rate-setting meeting has been slated for Dec. 11, the last for the year.

“(T)he BSP turned more balanced in its last policy meeting, marking a slight departure from its previous hawkish stance. Amid falling oil prices and inflationary pressures, we think the next policy move is only likely to come next year,” Barclays said in its Emerging Markets Quarterly report.

“We are pushing back our 25-bps rate hike to Q4 (fourth quarter) 2015, as despite resilient growth, the more gradual path of inflation should provide basis for the BSP to tighten policy, in a more gradual manner,” the bank added.

Barclays further said the central bank is expected to remain vigilant on inflation pressures as the target range narrows to two to four percent in 2015 and 2016.

“The impact of earlier rate hikes is working its way through the economy,” the bank said, noting the BSP believes bulk of the impact may be felt next year.

Moreover, the recent hikes in the reserve requirement ratio of banks and the special deposit account rate have already been reflected in the falling domestic liquidity growth.

“At the same time, given a stronger US dollar and general risk aversion towards emerging markets, capital inflows into the Philippines have slowed. This should further limit the risk of excess reserves building up,” Barclays said.