Private analysts see the Philippine central bank remaining confident about the soundness of the country’s economic fundamentals enough to keep its key policy rates steady for the rest of the year despite record-low inflation in August, but they warned some external factors still pose risks to price stability.
Such risks include prolonged dry weather conditions from El Nino and their impact on food supply, the US Federal Reserve’s monetary policy outlook, China’s economic slowdown and worse-than-expected repercussions on global growth, they said.
Since September last year, the Bangko Sentral ng Pilipinas (BSP) has kept its rate for overnight borrowing at 4 percent and overnight lending at 6 percent.
It has also left its special deposit account (SDA) rate unchanged at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.
Analysts at Singaporean bank DBS do not expect the central bank to cut or raise its interest rates anytime soon, but uncertainty over food prices amid a prolonged drought in the region lingers and must be considered in making any adjustment to the BSP’s policy stance.
“Cutting interest rates is clearly an option, although we don’t think the BSP is ready to do just that. It is not as if GDP [gross domestic product]growth has plunged,” DBS said in a research note.
The analysts pointed out that unless GDP growth were to fall below 5 percent, the authorities are unlikely to feel the need to provide any stimulus for the economy at this point.
Neither would the BSP consider a rate hike at this point as it no longer appears to be in a rush to tighten its policy stance after loan growth recently moderated to 13 percent year-on-year, they added.
An analyst from Barclays, a United Kingdom-based investment bank, expects the BSP’s policy stance to remain intact this year, but sees a possible cut in the reserve requirement ratio for banks later to allow the release of some liquidity into the financial markets.
“We think the BSP is comfortable with its policy stance, but we acknowledge outside risks of easing in the reserve requirement ratio for banks if liquidity conditions deteriorate due to capital outflows,” Barclays economist Rahul Bajoria, said in a report.
The central bank has repeatedly said it was watching the country’s liquidity conditions and said in its latest statement it stands ready to act if the conditions deteriorate.
“This is consistent with the central bank’s stance that while [economic]activity levels remain healthy, its main concerns center around volatility and market liquidity,” Bajoria said.
For the medium term, the risk centers on food shortages.
“While inflation is low currently, we think policymakers in the Philippines are still vigilant on weather risks. Agriculture production turned negative in the second quarter, and the government has indicated that it will import food stocks to avoid any potential shortfall in 2016,” Bajoria added.
ING Bank Manila senior economist Joey Cuyegkeng explains his view of a steady stance taken by the BSP, saying the need for monetary policy stimulus to spur economic growth is low for now. He said promising drivers of growth such as domestic demand, investment and government spending should sustain the pace of growth or boost momentum in the second half of 2015.
Low headline and core inflation (1.6 percent in August), however, provides leeway for appropriate monetary policy response to inflation risk, as well as risk to local financial stability that could come from overseas, including that from the US monetary policy outlook, China and global growth risks, and El Nino-related inflationary pressures.
One analyst thinks there might still be a chance for the central bank to raise its policy rates before the yearend, that is, in the event of a rate lift-off by the US Fed.
“With the [1.7 percent] year-to-date inflation slipping below the lower-end of the BSP’s inflation target again, monetary authorities may be watching the inflation path to ensure price gains settle within target over the policy horizon,” Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands, said in a note.
Mapa said the BSP may hike its key rate possibly in November to defend its 2016 inflation target of 2 percent to 4 percent—owing to a weaker peso and the El Niño pressure—if or when the Federal Open Market Committee raises the Fed funds target rate in September.