BSP rates seen to hold until mid-2016

MANILA, Philippines - UK-based investment bank Barclays sees the Bangko Sentral ng Pilipinas (BSP) keeping interest rates steady until the second quarter of next year as Philippine inflation remains benign. 

Barclays said benign inflation leaves the BSP more room to keep policy rates on hold. 

“Overall, we continue to expect the next policy decision to be a hike, but later. As such, we only expect BSP to deliver a rate hike in the third quarter of 2016, when election-related uncertainty should be over, and inflation is starting to pick up,” the investment bank said.  

Barclays said attention would shift to the May national elections starting in the fourth quarter. 

“In the meantime, we expect market attention to shift rapidly towards next May’s presidential election, which is likely to become a bigger focus going into fourth quarter 2015 as major candidacies have been announced,” it added. 

President Aquino has appointed Manuel Roxas II as the administration candidate while Vice President Jejomar Binay and Sen. Grace Poe have also announced their intention to run for the country’s top post. 

The BSP’s Monetary Board kept interest rates steady for the eighth straight time since October last year. 

“Even with inflation being low and first half growth being on the lower side, BSP appears comfortable with its policy stance, flagging that growth and inflation risks are largely coming from poor weather and the global backdrop,” Barclays said. 

Inflation eased to a new record low of 0.6 percent in August from 0.8 percent in July on the back of stable food prices and lower utility rates. 

BSP Deputy Governor Diwa Guinigundo earlier said monetary authorities further slashed its 2015 inflation forecast to 1.6 percent from the previous projection of 1.8 percent.

However, the BSP raised its inflation forecast to 2.6 percent instead of 2.5 percent for next year and to three percent in 2017 from the earlier projected 2.6 percent due to the impact of the prolonged El Niño weather condition. 

As noted by the BSP, Barclays said the biggest headwind for growth and inflation in the near term likely comes from poor weather.  

“Concerns of El Niño weather effects loom large over the Philippines, in our view, and agriculture production has slipped into negative territory for the year,” it added. 

Experts warned the current El Niño could be among the worst the Philippines has experienced, and water-rationing measures have already been implemented in districts including Metro Manila.  

At the same time, the government is taking precautionary steps to pre-empt disruptions to both rural incomes and inflation.