BSP rates seen to hold until 2016

MANILA, Philippines - Barclays and ANZ Bank see the Bangko Sentral ng Pilipinas (BSP) keeping interest rates steady until the first half of next year amid the benign inflation environment.

Barclays said it expects the BSP to tweak policy rates in the third quarter of next year instead of the fourth quarter of this year after the central bank lowered its inflation forecast to 1.8 percent from 2.1 percent this year.

The BSP has set an inflation target range of two to four percent this year.

Inflation averaged 1.9 percent in the first seven months of the year after easing to a 20-year low of 0.8 percent in July from 1.2 percent in June amid stable food prices and lower utility rates.

“Benign inflation leave a room to keep policy on hold for the time being, especially with the recent weakness in the peso. As such, we are pushing back our forecast of a rate hike in the fourth quarter 2015, to the third quarter 2016, when election-related uncertainty should be over, and inflation starting to pick up,” Barclays said.

Monetary authorities decided to keep interest rates unchanged during its policy setting meeting last Aug. 13 but cited risks brought about by the longer-than-expected El Niño weather condition.

The BSP has kept policy rates steady since September last year. The overnight borrowing rate is pegged at four percent and the overnight lending rate at six percent.

BSP Governor Amando Tetangco Jr. earlier said the decision to keep key policy rates unchanged was based on its assessment that prevailing price and output conditions support maintaining current policy settings.

“In deciding to keep the BSP’s monetary policy settings unchanged, the Monetary Board observed that the recent benign inflation outturns have been a result of favorable supply-side conditions, which are seen as largely transitory,” Tetangco said.

Monetary authorities noted the upside risks coming from pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food prices and utility rates.

However, he explained the modest rise in food and commodity prices as well as slower global economic activity could pose downside risks to inflation.

“This makes it clear that while inflation is low, the bank is watchful of supply side shocks that could push up prices. There have recently been some signs that food production may come under pressure, as the Philippines recently announced that it would miss its 2015 rice production targets, raising the likelihood of higher imports in order to ensure adequate stocks,” Barclays said.

On the other hand, ANZ Bank said the BSP is likely to keep policy rates steady until the first half of next year.

“We therefore maintain our forecast that the central bank will remain on hold through the first half 2016. The expected effects of El Niño, coupled with the persistent delays in infrastructure, both beyond the influence of the central bank, are the main risks to growth,” ANZ Bank said.

The investment bank pointed out monetary authorities arrived at the decision despite external shocks brought about by the weakening of the peso after the People’s Bank of China decided to devalue the yuan.

“The BSP did note that developments on the global front need careful monitoring, but also noted that this was from a perspective of financial stability. Our reading of the BSP reaction is that prudence, i.e. a steady hand on policy settings, remains the likely outcome going forward,” ANZ Bank said.