MANILA, Philippines - London-based think-tank Capital Economics Ltd is expecting the Bangko Sentral ng Pilipinas (BSP) to raise its key policy rates by 25 basis points as early as June this year immediately after the May 2010 presidential and national elections.
“We forecast that the first hike will come in early June, once May’s Presidential and Congressional elections are out of the way,” the think-tank stated in a study dated March 11.
The BSP has kept its key policy rates at record lows since July last year. It reduced its key policy rates by 200 basis points between December of 2008 until July last year as part of an easing cycle to cushion the impact of the global economic slowdown.
The overnight borrowing rate is currently pegged at a record low of four percent while the overnight lending rate is at six percent.
“The upshot is that we expect a first 25 basis point hike in the overnight rate at the BSP meeting in early June. This seems more likely to us than a rate increase at the next (late April) BSP monetary policy review, which is probably too close to the May elections,” it said.
In all, Capital Economics expect the BSP to raise its policy rates by 100 basis points this year.
“We continue to anticipate that policy rates will reach five percent by end-2010,” the think-tank said.
Last March 11, the central bank’s Monetary Board decided to keep its key policy rates unchanged at record lows but continued unwinding its accommodative stance by phasing out more liquidity enhancing measures due to clearer signs of increasing momentum in economic recovery.
However, the Monetary Board decided to lift several liquidity-enhancing measures introduced starting November of 2008 to cushion the impact of the global financial meltdown given ample liquidity and the continued stability of financial markets.
Measures that were tweaked included the reduction of the peso rediscounting budget to P40 billion from P60 billion as well as the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument.
The BSP also decided to bring back the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points above the latest available industry average NPL for banks wishing to avail of the rediscounting facility.
“The BSP kept up its gradual tightening by cutting the amount available under its rediscount facility, which allows banks to borrow using loans as collateral,” Capital Economics added.
The think tank said the revised inflation forecasts of the BSP of 4.64 percent for 2010 and 3.45 percent for 2011 would still fall within the BSP target of between 3.5 percent and 5.5 percent this year as well as three percent to five percent next year.
“While food and wage pressures will probably intensify near term and will likely lift inflation to the top end of the target range, we agree with the government and believe that there is a good chance that consumer price gains will not breach the target in 2010 and 2011 as a whole,” it said
The think tank sees the country’s domestic output as measured by the gross domestic product (GDP) expanding by 4.5 percent this year from 0.9 percent last year
Its GDP growth forecast is more optimistic than the government GDP growth target of between 2.6 percent and 3.6 percent this year.