BSP likely to hold key rates – Metrobank

MANILA, Philippines - The continuous easing of domestic liquidity growth and manageable inflation expectations should allow the Bangko Sentral ng Pilipinas to hold key rates steady this year, the research arm of Metropolitan Bank and Trust Co. said.

“The normalization in the domestic liquidity signals that further hike in the BSP’s key policy rates is not likely to happen this year,” Pauline Revillas, research analyst at Metrobank, said in a recent report.

Latest BSP data showed M3 – the broadest measure of liquidity – expanded nine percent to P7.304 trillion in November from a year earlier. This was a further deceleration from the 15.4 percent pace in October and the 16.2 percent in September.

“The downtrend in money supply has also helped dampen the upward pressure on inflation,” Revillas said.

“The expectation that M3 growth will continue to stabilize this year would also boost the prospect that inflation rates for 2015 will also remain low and manageable,” she added.

Monetary authorities during their last two rate-setting meetings in 2014 left the overnight borrowing and overnight lending rates unchanged at four percent and six percent, respectively. These decisions were due to inflation expectations falling within the central bank’s targets for 2014 until 2016.

In the third quarter of last year, the BSP raised key rates by a total of 50 basis points to ensure inflation expectations would settle within the goals over the policy horizon.

Moreover, the central bank earlier in 2014 implemented a series of hikes on the banks’ reserve requirement ratios and the special deposit account rate to bring down excessive liquidity growth and ensure the pass-through of increasing key policy rates would be more effective.

M3 growth hit 30 percent in July last year and remained above that level following a 150-basis point reduction in the SDA rate in early 2013 and the restriction of investment management accounts or singular fund accounts offered to retail investors in the same facility.

The BSP has discouraged parking funds in the SDA so investors would instead put their money in activities and instruments that will benefit the domestic economy.

The central bank’s Monetary Board would revisit policy settings next on Feb. 12.