BSP seen keeping interest rates steady

MANILA, Philippines -  Singapore-based DBS Bank Ltd. expects the Bangko Sentral ng Pilipinas (BSP) to keep its policy rates steady this week due to the lower-than-expected gross domestic product (GDP) growth in the second quarter of the year.

DBS said in its Daily Breakfast Spread that the BSP’s Monetary Board would likely keep the overnight borrowing rate steady at 4.50 percent and the overnight lending rate unchanged at 6.50 percent during the scheduled policy rate setting meeting on Sept. 8 but would raise policy rates by 25 basis points in the fourth quarter of the year.

Originally, the investment bank projected a 25 basis point hike in the third quarter and another 25 basis points in the fourth quarter of the year.

DBS said the lower-than-expected GDP growth in the second quarter of the year would give monetary authorities enough elbow room to keep interest rates steady.

The National Statistical Coordination Board (NSCB) reported last week that the country’s GDP growth slackened to 3.4 percent in the second quarter of the year from 8.9 percent in the same quarter last year due to the surge in world oil prices, the prolonged weakness of the global economy, the political unrests in the Middle East and North African (MENA) region, and the disasters in Japan.

The GDP growth in the second quarter was also slower than the revised 4.6 percent booked in the first quarter of the year. This brought to four percent the GDP growth in the first half of the year from 8.7 percent in the first semester last year.

“The weak set of results comes as no surprise as a high base effect in 2010, coupled less-than-encouraging export numbers combined to result in declining headline growth,” the investment bank said.

DBS explained that the below-consensus second quarter GDP growth figure would put economic concerns firmly on the central bank’s agenda as the economic outlook for the coming quarters is still cloudy and recent export figures have not been encouraging.

“The BSP will be under pressure to help stimulate the domestic economy to limit the potential drag from external demand. Inflation, while likely to tick up, has thus far been benign,” it added.

According to the investment bank, average inflation this year would fall within the three percent to five percent target set by the BSP despite additional price pressures arising from expanding loan growth. Inflation has averaged 4.3 percent in the first seven months of the year from 4.2 percent in the same period last year.

“As such, there is still no need to hike rates at this point and monetary normalization will likely be pushed back,” DBS stressed.

The investment bank believes that the GDP growth of the Philippines in the second half would be dependent on investment growth arising from the Aquino government’s Public-Private Partnership (PPP) scheme as well as the reversal of weak external demand as there are no clear sgns that the US and the eurozone are on a recovery path.

“With this set of weak GDP numbers and recent uninspiring export figures, the focus of the central bank is likely to remain firmly on growth. As such, it is looking increasingly unlikely that the BSP will opt to hike rates at the upcoming monetary policy meeting,” it said.

DBS sees the country’s GDP expanding by 4.8 percent this year and 5.2 percent next year from 7.6 percent last year. The country was on the verge of a recession in 2009 after its GDP growth slackened to 1.1 percent from 3.8 percent in 2008 due to the full impact of the global financial crisis.

“Risks to our 4.8 percent growth forecast for 2011 are even on both the upside and the downside, depending on how the external situation plays out,” DBS added.

The Cabinet-level Development Budget Coordination Committee (DBCC) has set a GDP growth target of between 7-8 percent this year from 7.6 percent last year but now expects the GDP to expand by 5-6 percent this year.