Economists see BSP hiking interest rates next week

MANILA, Philippines - Economists and analysts of foreign investment banks see the Bangko Sentral ng Pilipinas (BSP) raising interest rates next week due to the continued build up in inflation pressures amid rising prices of oil and commodities in the world market.

Vincent Tsui, economist at Standard Chartered Bank, said the BSP is expected to raise its key policy rates by another 25 basis points on June 16 to keep inflation expectations well anchored.

“Although dissipating upside pressure on inflation gives BSP more flexibility in setting monetary policy, we believe inflation expectations are yet to be anchored and are still vulnerable to commodity-price volatility,” Tsui said.

He pointed out that benign economic fundamentals after the country’s gross domestic product (GDP) growth slowed down to 4.9 percent in the first quarter of the year from the revised 8.4 percent in the same quarter last year warrant further increase in interest rates.

“Meanwhile, benign fundamentals, as underpinned by yesterday’s report, suggest that a further normalisation of monetary policy is required to contain overheating concerns, given that real policy rate remain close to zero,” the economist added.

The BSP has so far raised interest rates by 50 basis points as a preemptive move to keep inflation expectations well anchored amid the escalating oil prices. The brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

The BSP managed to keep interest rates steady for 20 straight months between July 2009 and March 2011 due to the benign inflation outlook. The body slashed policy rates by 200 basis points from December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy bringing the overnight borrowing rate to a record low 4.50 percent and the overnight lending rate to six percent.

The continued build up in inflation pressure, however, prompted monetary authorities to raise interest rates by 25 basis points last March 24 and by another 25 basis points last May 5.

Without the rate increases, the BSP’s inflation target of three percent to five percent this year and next year would be breached. The BSP said Inflation could average 5.6 percent this year and 4.2 percent next year without the series of rate hikes.

Tsui said the Standard Chartered bank also raised its inflation forecast to 4.7 percent instead of 4.3 percent this year as buoyant domestic activity and the accompanying capacity pressure on the economy have exacerbated second-round inflationary effects on the economy from rising oil prices earlier this year.

He pointed out that inflation would likely peak at above five percent in July as a lower base and rising services cost would keep consumer prices elevated in the second half of theyear.

With inflation expected to show signs of peaking in the coming months, Tsui said the BSP’s Monetary Board would likely focus on managing domestic liquidity in the third quarter by raising the reserve requirement back of 21 percent from the current 19 percent instead of further raising interest rates.

However, the economist explained that the BSP would resume its tightening stance by raising interest rates by 50 basis points in the fourth quarter of the year due to the expected heigthened economic activity that would boost the GDP growth in the second half.

On the other hand, Swiss-owned UBS economist Edward Teather said the slower but sustained economic growth in the Philippines continue to favor gradual adjustment in its monetary policy stance.

“All this appears to support gradual policy tightening from the BSP,” Teather said.

UBS sees the BSP jacking up interest rates by 50 basis points over the next six months.

According to him, the policy rate setting body would raise interest rates by 25 basis points twice in the second half of the year.

“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,” Teather added.