BSP expected to maintain policy rates

MANILA, Philippines - Economists and analysts believe that the Bangko Sentral ng Pilipinas (BSP) would keep its key policy rates unchanged during the meeting of the Monetary Board tomorrow.

Singapore-based DBS Bank Ltd. and Switzerland-based UBS AG said the BSP’s policy-setting body is widely expected to keep its overnight borrowing rate and overnight lending rate steady on July 15.

UBS economist Edward Teather said in its Asian Economic Comment entitled “Asean Monetary Policy Update” that unlike the Bank of Thailand the BSP is likely to keep its key policy rates unchanged this week.

“We expect an initial 25 basis points policy rate increase from the Bank of Thailand on July 14 but not the BSP on July 15,” Teather stressed.

Aside from the Philippines and Thailand, he pointed out that Bank Indonesia has yet to adjust its key policy rates while other banks such as Taiwan and Malaysia have raised their policy rates.

“The Philippines has more of a case than Indonesia to delay the onset of policy normalisation given more moderate credit and inflation trends. However, there is a case for the Bank of Thailand to begin to normalise policy rates this week,” Teather added.

David Carbon of DBS, in a study shared Teather’s sentiment that the Philippine central bank is likely to keep its key policy rates unchanged but the Bank of Thailand would likely adjust its policy rates upwards.

“The rate decisions in Thailand and the Philippines will be interesting to watch this week. While BSP is widely expected to keep its policy

rates unchanged on Thursday, many economists expect Bank of Thailand to hike rates on Wednesday,” the investment bank added.

Carbon said Taiwan, India, Malaysia, and Korea have all hiked interest rates as gross domestic product (GDP) growth in Asia is far above pre-crisis levels while inflation is nearly back to average.

“Interest rates must return to normal too and they are. The rate hikes are a loud vote of confidence from Asia’s central banks that growth will continue despite weakness in Europe,” he explained

It would be recalled that the Monetary Board decided to slash its key policy rates by 200 basis points between December of 2008 to July of 2009 as part of its accommodative stance to cushion the impact of the global economic meltdown. This brough the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.

The policy-setting body has kept its policy rates unchanged for eight consecutive policy-setting meetings since July last year in the face of uncertain global economic prospects and with recovery proceeding at different stages and speeds in various parts of the world.

Carbon said the BSP would likely raise its key policy rates by 50 basis points in the second half of the year and by another 25 basis points on the first quarter of the year.

The BSP has lifted all its crisis-intervention measures since the start of the year except for the reduction of the reserve requirement for banks to 19 percent from 21 percent in its bid to release more liquidity into the financial system to soften the impact of the global economic meltdown.

Last January 28, the BSP raised the rate on a short-term lending facility to four percent from 3.5 percent marking the start of an exit strategy with the tweaking of exiting liquidity enhancing measures.

Last March 11, monetary authorities reduced the peso rediscounting budget to P40 billion from P60 billion, restored the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and restored the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.

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.