BSP's tightening stance seen to continue

MANILA, Philippines - The Union Bank of Switzerland (UBS) expects the Bangko Sentral ng Pilipinas (BSP) to continue with its tightening stance even as the Philippine economy posted slower growth in the first quarter of the year.

In its latest report on the Philippines, UBS said the first quarter growth of 4.9 percent, which was slower than the 8.4 percent recorded a year ago seems to support gradual policy tightening by monetary authorities.

“We continue to expect 50 basis points of policy rate increases in two 25 basis points steps over the next six months (taking rates to five percent). This will leave monetary policy settings fairly easy but could give some support to the currency as BSP rate hikes have lagged those elsewhere in the region as a result of hitherto benign inflation pressures,” UBS said in a report yesterday.

Last May 5, the BSP raised policy rates by 25 basis points as part of efforts to curb inflation, which has accelerated to a one-year high of 4.5 percent in April.

As such, the BSP decided to raise the overnight borrowing rate to 4.50 percent from 4.25 percent and the overnight lending rate to 6.50 percent from 6.25 percent.

In its statement following the latest monetary tightening, the BSP said, “international oil prices have remained elevated due to strong global demand as well as concerns about supply gaps.”

UBS said that its growth forecast for the year remains at 4.4 percent, slower than the official growth projection of seven percent to eight percent for 2011.

 However, UBS said actual growth could be higher than 4.4 percent if momentum does not fade and the global economic environment improves.

For its part, Barclay’s Capital expects the Philippine economy to grow by five percent this year, supported by strong business investment.

“We expect business investment to remain relatively strong given still upbeat confidence, though businesses are concerned about elevated commodity prices,” Barclays said in a separate report on the Philippines.