UK think tank sees BSP hiking key rates by July

MANILA, Philippines - London-based think tank Capital Economics Ltd. said the Bangko Sentral ng Pilipinas (BSP) is likely to finally adjust upwards its key policy rates starting next month as the strong economic expansion could stoke up inflation over the next few months.

Kevin Grice, senior international economist at Capital Economics, said in a report that inflation pressures would rise as the stronger-than-expected growth in the first quarter is expected to be sustained in the coming quarters.

“With growth set to hold at a strong pace in coming quarters, inflation pressures will rise. Therefore, the monetary tightening needs to step up a gear,” Grice stressed.

Economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) revised upwards the country’s gross domestic (GDP) growth target to five percent to six percent instead of 2.6 to 3.6 percent after the GDP grew to its fastest rate in almost two years.

The GDP grew by 7.3 percent in the first quarter of the year from 0.5 percent in the same quarter last year. The Philippines escaped recession last year after the GDP expanded by 0.9 percent from 3.8 percent in 2008.

Capital Economics said the BSP would raise its key policy rates by 25 basis points during its meeting next month scheduled on July 15.

The think tank now expects the BSP to raise its policy rates by 150 basis points instead of only 100 basis points. It earlier expected the BSP to raise policy rates by 100 basis points to five percent this year and by another 50 basis points to 5.5 percent by 2011.

“We continue to forecast that rates will move up 25 basis points at the central bank meeting in July and that rates will reach 5.5 percent by end 2010, from four percent now,” the think tank added.

The BSP slashed its key policy rates by 200 basis points to a record low four percent for the overnight borrowing rates and six percent for the overnight lending rates between December of 2008 to July of 2009 to cushion the impact of the global economic meltdown.

It has kept its rates at record lows for seven straight policy setting meetings since July last year but has continued to unwind crisis-related measures adopted in November of 2008 to release liquidity into the financial system to support domestic economic activity to survive the global economic meltdown.

Crisis-related measures adopted way back in November of 2008 that were tweaked included the increase in the rate on a short-term lending facility to four percent from 3.5 percent last January 28 as well as the reduction of the peso rediscounting budget to P40 billion from P60 billion, the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and the restoration the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points last March 11.

Last April 22, the central bank continued unwinding of crisis intervention measures that were adopted since November of 2008 by further reducing the budget for peso rediscounting facility to to pre-crisis level of P20 billion from P40 billion.

Capital Economics sees the GDP expanding by 5.5 percent this year and by five percent next year from 0.9 percent last year.

“Accordingly, we have expected for a while that GDP will climb around 5.5 percent in 2010, and then 5.0 percent in 2011,” Grice said.

The forecast of the think tank was within the revised GDP growth forecast of the DBCC but was higher than the market concensus of 3.9 percent this year and 4.4 percent next year.

Capital Economics said the economic growth would continue to be fuelled by the projected 10 percent growth in the amount of money sent home by Filipinos working abroad.