DBS sees BSP keeping rates due to rising oil prices

MANILA, Philippines - Singapore-based DBS sees the Bangko Sentral ng Pilipinas (BSP) keeping interest rates steady today due to rising oil prices but British banking giant HongKong and Shanghai Banking Corp. (HSBC) expects monetary authorities to cut policy rates by 25 basis points.

In a report, DBS Group Research said the BSP would likely pause in its monetary easing today due to the possible impact of rising global oil prices on domestic inflation.

“Rising oil prices may prompt a pause at the upcoming monetary policy meeting on Thursday before rate cuts are resumed in April,” DBS stressed.

The investment bank sees another 25 basis point reduction in key interest rates within the second quarter of the year before the rates are kept on hold for the rest of 2012.

DBS sees inflation rate averaging four percent this year or well within the target of three percent to five percent set by the BSP.

“Conditions remain compelling for maintaining loose monetary policy. Headline inflation remains well-behaved and will likely continue trending down,” it added.

The BSP reduced interest rates by 25 basis points last Jan. 19 bringing the overnight borrowing rate to 4.25 percent and the overnight borrowing rate to 6.25 percent due to manageable inflation and weaker than expected global economy.

“With no signs of a recovery in the export sector just yet, the focus of the BSP will likely be on supporting domestic demand,” DBS said.

The country’s gross domestic product (GDP) growth slowed to 3.7 percent last year from 7.6 percent in 2010 due to weak global trade and underspending by the Aquino administration.

For its part, HSBC expects the BSP to slash interest rates by another 25 basis points today on the back of favorable inflation outlook that could support economic growth amid rising oil prices in the world market.

HSBC economist Trinh Nguyen said in a report that the BSP would further ease its monetary policy stance to support domestic spending on the back of strong liquidity in the financial system.

“As such, a 25 basis point cut to four percent is expected when monetary officials next meet on March 1,” Nguyen said.

While the Philippines is exposed to the fluctuation of oil prices, the economist explained that the impact of high global oil prices is quite muted in terms of headline inflation.

It pointed out that fuel, light and water together only make up 7.1 percent of the total inflation basket while food accounts for about 40 percent.