BSP expected to further hike SDA rates next month

MANILA, Philippines - The Bangko Sentral ng Pilipinas is expected to further increase the interest rate on the special deposit account next month and keep the key policy rates steady until the last quarter of the year, UK-based Barclays said.

In a research note, economist Rahul Bajoria said the bank is revising its forecast of a key policy rate hike in the third quarter, and penciling this in October to December.

He made the comment following the BSP’s move to hike the SDA rates by 25 basis points while maintaing the overnight borrowing and overnight lending rates at 3.5 percent and 5.5 percent, respectively.

“Given today’s (Thursday) move, we think the BSP has a preference for raising SDA rate to address liquidity concerns, and we now expect another 25 basis points increase in SDA rates at the next policy meeting in July, but no increase in the policy rate at that time,” Bajoria said.

“We revise out forecast of the policy rate, and now expect it to remain steady, at 3.5 percent, in the third quarter of 2014. We expect Bangko Sentral to start raising official rates only in the fourth quarter, if its does not lower its inflation forecasts,” he continued.

The Monetary Board on Thursday left key policy rates unchanged amid expectations inflation will remain within the three to five percent target range. The action came despite this year’s inflation forecast being raised to 4.4 percent from an earlier projection of 4.3 percent.

But monetary authorities decided to hike the SDA rate to 2.25 percent to rein in liquidity growth, which has remained above 30 percent since July last year. This followed the BSP’s action of raising the reserve requirement ratio by a total of two percent in the previous policy meetings.

“Today’s decision to hike the SDA rate will help to assuage some concerns on inflation risks, but the upside risks to inflation persists,” Bajoria said.

“The central bank has said that the SDA was increased to contain risks from ample liquidity. BSP Governor (Amando)Tetangco Jr. also added that the central bank has room for ‘measured adjustment in SDA rates’ given strong growth, and added that the BSP is ready to undertake ‘further actions as necessary’,” the economist said.