BSP expected to tighten policy rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is expected to tighten policy settings further after delivering a 25 basis points increase in key rates last Thursday as inflation continues to climb, banks said in separate reports.

UK-based Barclays and Singapore-based DBS Bank both forecast another increase of 25 basis points in the overnight borrowing and overnight lending rates before the year ends. Bank of the Philippine Islands (BPI), meanwhile, expects the central bank to deliver further gradual adjustments in key policy rates and the special deposit account rate until 2015.

“We continue to see upside risks to inflation, but we believe BSP is in a good position to meet its 2014 inflation forecast… BSP has acknowledged that inflation expectations are elevated and that the balance of risks to inflation is biased to the upside,” Rahul Bajoria, regional economist at Barclays, said in a research note.

“The bigger challenge is to keep inflation in the two to four percent band for 2015,” he added. Apart from raising key policy rates, Bajoria said Barclays sees at least another 25 basis points  hike in SDA rates.

Monetary authorities on Thursday hiked the overnight borrowing and overnight lending rates to 3.75 percent and 5.75 percent, respectively. This was the first adjustment in key policy rates after they were cut to record lows in October 2012.

The BSP cited risks to the inflation target, particularly for 2015, as the rate is expected to settle near the higher end of the two to four percent band. The central bank has revised its average inflation forecast for 2015 to 3.72 percent from 3.65 percent.

For this year, inflation is forecast to average 4.33 percent from an earlier projection of 4.4 percent. This is above the midpoint of the three to five percent target range this year.

Inflation has so far averaged 4.2 percent as of June this year.

“The key message from the BSP’s decision… is that it is making the adjustments from a position of strength. Second quarter GDP data at the end of August may show further easing of GDP growth momentum but this is partly a result of the high base effects,” Gundy Cahyadi, economist at DBS, said in a separate research note.

“The BSP is simply playing a balancing game here, which presumably also explains the decision to hold the SDA rate constant,” he continued, noting his bank sees another 25-basis points increase in key rates by September.

For his part, Emilio S. Neri, Jr., lead economist at the BPI, expect. The central bank to deliver further adjustments both in key policy rates and the SDA rate for the rest of the year until 2015.

“We now see another 75 bps cumulative increase in the SDA and RRP rate through end-2015 but, like [Thursday’s] ... decision, will continue to be very orderly adjustments to the gradual normalization of monetary policy in the west,” Neri said.

“This should prove to be a sharp contrast to the abrupt and destabilizing variety that we have seen and still expect to see from the sizable tightening moves elsewhere in Emerging Market space,” he also said.