BSP may hike rates on strong first quarter growth

MANILA, Philippines – Investment banks expect the Bangko Sentral ng Pilipinas (BSP) to finally adjust its key policy rates in the third quarter of the year after the country’s gross domestic product (GDP) grew at its fastest pace in almost three years in the first quarter.

London-based think tank Capital Economics said the BSP’s Monetary Board would likely keep its policy rates unchanged next week before adjusting the rates upwards in the middle of July with the release of a stronger-than-expected 7.3 percent GDP growth in the first three months of the year.

“The central bank meets next week and the decision on whether to raise the reverse repo rate is likely to be close. First quarter GDP clearly increases the chance of a move sooner rather than later. But external risks and the slow election result BSP may… From B-1 count may delay the first hike,” said Capital Economics international economist Ashira Perera.

Perera said in a study entitled “The Philippines’ Strong Start in 2010 is Likely to Last” that the country’s overnight borrowing and lending rates would be increased by one percentage point (100 basis points) this year and by another 50 basis points next year.

Initially, the economist said the BSP would hold its overnight borrowing rate at a record low of 4.0 percent and its overnight lending rate at 6.0 percent on June 3 before jacking up the rates by 25 basis points on July 15.

“We expect that BSP will keep rates on hold at 4.0 percent in June but will hike by 25 basis points at their next meeting in mid-July. We also continue to forecast that rates will rise to 5.0 percent by year-end, and will peak at 5.5 percent by end-2011,” Perera added.

Capital Economics said inflation would probably accelerate in the coming months as the upswing continues, spare capacity diminishes, and wage pressures climb but would remain comfortably within the 3.5 - 5.5 percent target set by the BSP.

The think tank also revised upwards its GDP growth forecast for th Philippines to 5.5 percent instead of 4.5 percent given the strong start at the year.

For its part, New York-based investment bank Goldman Sachs said the BSP would be forced to start raising its key policy rates starting the third quarter of the year to curb a possible build up of inflationary pressures in light of the stronger-than-expected GDP growth and the clamor for wage increase from workers’ groups.

“Given the continued growth recovery and ongoing demand for higher wages, we expect BSP to be pre-emptive and start raising rates in third quarter of 2010,” Goldman Sachs said in a study entitled “Philippine Q12010 GDP: A stronger-than-expected GDP Print.”

The investment bank said the increase in policy rates and the robust inflows from overseas Filipino workers (OFWs) as well as strong foreign direct investments (FDIs) would continue to support the peso against the dollar.

“Favorable flows and our expectation of the central bank raising rates are likely to be supportive of the Philippine peso over the medium term. In the past, smooth and successful elections have supported the peso through improved sentiments,” Goldman Sachs said.

On the other hand, New York-based JP Morgan Chase Bank expects monetary authorities to tweak its key policy rates as early as June 3 due to the stronger-than-expected GDP growth in the first quarter of the year

Matt Hildebrandt of JP Morgan said the decision of the BSP’s Monetary Board would be close in light of heightened risks emanating from global financial markets and sovereign stress elsewhere in the world.

“Official comments following the GDP release suggest that the government expects the economy to continue growing this year despite risks from global financial markets, which along with rising inflation, leads us to think that BSP will hike 25 basis points at next week’s meeting,” Hildebrandt said.

Due to the strong growth, JP Morgan also revised upwards its GDP growth forecast for the Philippines to 6.8 percent from 4.5 percent for 2010.