US think tank sees RP interest rates rising

MANILA, Philippines – New York-based think tank Global Source Partners expects the Bangko Sentral of Pilipinas (BSP) raising its key policy rates by 25 basis points amid the stronger-than-expected gross domestic product (GDP) growth in the first half of the year as well as the additional pressures on inflation.

In a report, Global Source Partners said the decision of the BSP to keep its key policy rates at record lows emphasized that strong investment performance worked to moderate price pressures by adding to the country’s productive capacity.

Last week, the BSP kept its key rates at record lows for the 10th consecutive policy-setting meeting since July last year on the back of benign inflation outlook despite the stronger-than-expected gross domestic product (GDP) growth in the first half of the year. The BSP’s overnight borrowing rate is pegged at a record low of four percent while the overnight lending rate is at six percent.

The BSP slashed its key policy rates by 200 basis points during the height of the financial crisis in the US in December 2008 and July of 2009 but introduced several liquidity-enhancing measures to cushion the impact of the global economic crisis. It has kept the rates steady since July last year but has withdrawn almost all of the crisis-related measures.

Over the weekend, BSP Governor Amando M. Tetangco Jr. said it is possible for the BSP to keep its key policy rates unchanged at record lows this year despite the stronger-than-expected economic growth in the first half as well as the benign inflation outlook.

“Yes it is possible provided that there are no major events that can lead to a significant change in the inflation outlook,” Tetangco stressed.

The BSP has three policy-setting meetings left this year scheduled on Oct. 7, Nov. 18, and Dec. 30.

Global Source Partners sees inflation averaging at four percent this year and 4.1 percent next year due to the expected increases in food commodity prices, further deterioration of agricultural output because of La Niña floods, the withdrawal of subsidies on rice, railt transit fare hike as well as possible rate and road toll hikes.