Private bank analysts see an increased chance that the central bank will lower its benchmark rates in the near future as a result of the 20-year low inflation rate of 1.6 percent in May, but are not yet certain when or to what degree monetary policy action will be taken.
Philippine headline inflation in May hit its slowest pace since 1995.
Analysts from UK-based investment bank Barclays and Standard Chartered Bank said the Bangko Sentral ng Pilipinas (BSP) may easing its benchmark policy rates if inflation rate continues to fall.
Meanwhile, analysts from banking giant HSBC retained their outlook that the BSP will keep its current policy stance for the rest of 2015, while Singapore-based bank DBS views a rate cut as possible but unlikely if other economic indicators remain favorable.
Since September last year, the BSP has kept the rate for overnight borrowing, or reverse repurchase (RRP) facility at 4 percent, while that for overnight lending or repurchase facility was at 6 percent.
The special deposit account (SDA) rate was also frozen at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.
In their view, Barclays’ analysts noted that the central bank’s statement on May inflation print suggested an “increased risk of a shift in policy stance.”
In his comments after the release of the May inflation figure, BSP Governor Amando Tetangco reiterated that inflation expectations continued to be well anchored, but pointed out a need to closely monitor risks that could impact consumer prices in the coming months.
“However, he also said that policymakers would “see if there’s a need to adjust policy stance,” and importantly, he did not repeat comments made in recent weeks that the current policy stance “remains appropriate”,” the analysts noted.
“While not our base case, a prolonged period of inflation below target could raise risks of a one-off [interest rate]cut,” they added.
Hawkish stance to soften
On the other hand, a StanChart analyst said they currently expect the central bank would hike rates only after the US Federal Reserve hikes rates, and that weak GDP growth in the first quarter may instead lead to the BSP easing its policy stance.
“The surprisingly weak first-quarter gross domestic product [GDP] number has made the Philippine central bank more likely to soften its hawkish stance (compared with other central banks) later this year, if inflation slows more than expected,” StanChart economist Jeff Ng said.
In addition, the analyst pointed out inflationary expectations over the next six months would most likely be critical to StanChart’s BSP policy rate call.
Ng also expects inflation to slow to 2 percent in the second and third quarter before spiking in the fourth quarter, but possibly falling below the BSP’s full-year target of 2 percent to 4 percent for some months.
“If inflation continues to slow, the BSP may delay its rate hike or cut rates near-term to support growth, in our view,” he concluded.
Unlikely to alter policy rates
Trihn Nguyen, economist at HSBC, believes that despite the lower-than-expected inflation in May, the BSP is unlikely to alter its policy rates.
“May CPI [consumer price index]is below the BSP’s 2 percent to 4 percent inflation target, but we do not expect the central bank to change rates in 2015,” she said.
The economist suggested that the central bank will see through the CPI and economic growth slowdown and keep policy rates on hold, instead opting for more effective policy tools, such as managing the exchange rate.
“External factors did drag down GDP by almost 2 percentage point in the first quarter of 2015. As such, the BSP may be more tolerant towards a weak Philippine peso, relieving some pressure on the Philippines’ external sectors,” she said.
Lastly, Nguyen noted that a potential Fed rate hike would also keep the BSP vigilant, making it to keep rates on hold for all of 2015.
For DBS analysts, an inflation rate that stays within target and moderated loan growth may dispel the need for the BSP to tighten its policy rates this year, although there is some risk that the BSP might instead cut rates.
“Average CPI inflation for this year is likely to be in the lower half of the central bank’s 2 percent to 4 percent target. Coupled with a moderation in loan growth, the central bank is unlikely to tighten its policy further this year,” they added.
The analysts stressed there are arguably some risks that the central bank may instead be tempted to loosen its policy stance at some point this year.
However, they see no strong reason why this will happen because the DBS’ current projection for 2015 GDP growth at 6 percent still puts the Philippines among the fastest growing economies in the region.
With this in mind, steady rates are more likely remain for the rest of the year, the analysts said.