Respite seen from BSP's tightening cycle

MANILA, Philippines - Investment banks Credit Suisse and Barclays Capital expect the Bangko Sentral ng Pilipinas (BSP) to take a break from its current policy tightening cycle next month as long as the second round effects arising from higher inflation are contained.

Credit Suisse economist Devika Mehndiratta said in a study entitled “Philippines: BSP hikes rates again but impact on market rates might be limited” that monetary authorities would keep an eye on the upward revision of minimum wages.

“If the announced increase in minimum wages is notably higher than the P25 that the BSP has built in, that would increase the chances of the third hike coming in at the next meeting itself,” Mehndiratta stressed. 

The next policy rate setting meeting of the central bank’s Monetary Board is scheduled on June 16.

No less than BSP Governor Amando Tetangco Jr. earlier warned that any wage increase exceeding P25 per day could fan inflation and put the central bank’s inflation target of 3-5 percent at risk.

The BSP’s Monetary Board has so far raised key interest rates by a total of 50 basis points in two consecutive policy rate setting meetings, bringing the overnight borrowing rate to 4.5 percent and the overnight lending rate to 6.5 percent.

The central bank raised policy rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid rising global oil prices and stronger domestic demand.

The BSP slashed interest rates by 200 basis points between December 2008 and July 2009, to cushion the impact of the global financial crisis on the domestic economy bringing policy rates to record lows.

Mehndiratta said Credit Suisse sees the BSP raising interest rates by 100 basis points, bringing the overnight borrowing rate to five percent and the overnight lending rate to seven percent.

“We continue to expect another 50 basis points in rate hikes in 2011. We maintain our view that while inflation in the Philippines is unlikely to go up to worryingly high levels as in 2008, it is likely to breach the upper band of BSP’s target range of three percent to five percent,” the economist added.

Credit Suisse sees the country’s inflation averaging 5.4 percent this year exceeding the BSP target of 3-5 percent.

Inflation kicked up to a one-year high of 4.5 percent in April from 4.3 percent in March, bringing the average inflation to 4.2 percent in the first four months of the year from 4.3 percent in the same period last year.

For her part, Barclays Capital economist Prakriti Sofat said monetary authorities could keep interest rates unchanged in June despite the fact that inflation could breach the five percent level next month.

She pointed out that the BSP could resume its tightening cycle in July.

“Our base case is for the BSP to stand pat in June to gauge developments on inflation expectations, but to deliver another 25 basis point hike in July, to 4.75 percent, given our expectation that inflation will exceed five percent in June,” Sofat stressed.

Barclays Capital sees inflation averaging 4.8 percent or within the 3-5 percent target set by the BSP.

“The main upside risks to inflation come from oil prices and strong domestic demand. The central bank remains concerned that sustained price pressures and higher inflationary expectations could influence future wage and price outcomes,” she added.