• Banks predict BSP will raise policy rates from Q2

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    Inflation is expected to build up in the months ahead due to possible power rate hikes and rising costs of consumer goods and imports, which banks said could compel the central bank to raise its key interest rates as early as the second quarter of the year.

    The Bangko Sentral ng Pilipinas (BSP) has indicated a bias toward policy tightening by raising the reserve requirement ratio (RRR) for commercial banks by 1 percentage point to 19 percent, as announced Thursday, effective from April 4.

    The hike was announced along with the decision to keep the BSP’s key policy rates steady as inflation still looked manageable, but the move was calculated to reflect a slow, gradual tightening pace and avoid causing any disruption to the financial markets.

    “We believe the BSP will try to keep rates on hold as long as inflation remains manageable.

    But inflationary pressures are likely to build from higher electricity and import costs, which is likely to cause the BSP to raise rates in Q2 (second quarter of) 2014,” global bank HSBC said in a report.

    HSBC said it expects the BSP rates to gradually rise in the second quarter beginning with a
    25-basis point hike and another 25 basis points in the third quarter to take rates up to 4 percent by end 2014.

    It said even though the BSP kept the overnight borrowing rate on hold, the fact it raised the reserve ratio by 1 percentage point was seen by bond market participants as an indication the BSP is willing to tighten its monetary policy, albeit on a gradual basis, the HSBC report said.

    “Expectations of a key policy rate hike in the near term cannot be ruled out and yields across the Philippines government curve are expected to rise,” it added.

    Standard Chartered Bank takes a similar view, saying it expects the central bank to gradually adjust the reserve requirement ratio of banks at two monetary policy meetings set for the second quarter of the year.

    StanChart sees the BSP hiking the RRR by 1 percentage point at each meeting to 21 percent and keeping it there until the end of the year.

    The BSP, said StanChart, may also hike its overnight borrowing rate to 3.75 percent in the third quarter before raising it to 4 percent by year-end. It also expects the interest rate for special deposit account (SDA) – the key policy rate by the BSP – to rise from 2 percent to 2.25 percent and 2.50 percent for the third and fourth quarters of the year, respectively.

    Separately, the United Kingdom’s Barclays said the RRR increase imposed by the BSP is a step in the right direction to help allay investor concerns that the central bank may be falling behind the curve. It added, however, is needed.”

    “We believe further increases in banks’ reserve requirement—at least a further 200 basis points—are likely over the coming three to four months,” the bank said in a report.

    Also given rising underlying inflationary pressures, Barclays expects the BSP to raise the reverse repo rate by 50 basis points, to 4 percent, with a 25 basis points increase in the second quarter and another in the third quarter to ensure that inflation expectations remain anchored.

    However, the bank said the impact of changes in the reverse repo rate is going to be limited, adding that the effective monetary policy rate is the Special Deposit Account (SDA) rate. It is seeing at least a 50-basis point hike in the SDA rate over the coming three to six months.

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