Later than original forecast: No interest rate hike until 2017 – Barclays

MANILA, Philippines – UK-based investment bank Barclays now sees the Bangko Sentral ng Pilipinas keeping interest rates steady this year on the back of the country’s slower- than expected economic growth.

Rahul Bajoria, regional economist at Barclays, said the investment bank expects the BSP to adjust interest rates in the second quarter next year instead of the third quarter this year.

“We continue to expect BSP’s next policy move to be a hike, but with 2016 growth now likely to be slower than we previously forecast, we recently delayed our forecast timing of the first hike to the second quarter 2017 from the third quarter 2016,” Bajoria said.

Barclays forecasts the country’s gross domestic product (GDP) expanding 5.5 percent this year.

The country’s GDP growth accelerated to six percent in the third quarter of last year from the revised 5.8 percent due to robust domestic demand and improving government spending.

This brought the GDP expansion to 5.6 percent in the first nine months of last year, way below the seven to eight percent target by economic managers due.

On the other hand, inflation eased to 1.4 percent last year from 4.1 percent in 2014 due to stable food prices and cheaper utility rates on the back of declining oil prices in the world market.

“The BSP is likely to hike when growth has recovered sufficiently and inflation is likely to be high enough to justify an increase in interest rates,” Bajoria said.

The investment bank lowered its inflation forecast to 2.2 percent instead of 2.4 percent despite the impact of the El Niño weather disturbance.

The BSP kept interest rates unchanged last year due to benign inflation environment and robust domestic demand. The central bank has kept rates steady for 10 straight policy-setting meetings since October 2014.

The overnight borrowing rate is currently pegged at four percent, the overnight lending rate at six percent, and the special deposit account (SDA) rate at 2.5 percent.

Bajoria said the BSP has enough policy space amid the normalization of interest rates in the US.

“Although there is external uncertainty in the form of the Fed rate hike cycle, we think the Philippines’ strong external position and low level of short-term debt should provide BSP enough policy space to maintain an accommodative stance even if rates in US head higher,” he said.