• BSP to tighten policy rates by 25 bps – analysts


    Analysts expect the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) to further tighten its policy stance at its meeting today (September 11) as part of measures to ensure its inflation targets are met.

    Private analysts believe that the Monetary Board will implement another 25-basis point (bps) hike in its benchmark interest rates to 4 percent and 6 percent. The current rate for overnight borrowing, or reverse repurchase (RRP) facility stands at 3.75 percent, while the rate for overnight lending, or repurchase facility (RP) is at 5.75 percent.

    The interest rate for special deposit account (SDA) is also expected to increase from 2.25 percent.

    “We expect the central bank to raise the special deposit rate by 25bp, taking it to 2.5 percent by end of the third quarter 2014. The reverse repurchase rate (RRP) will likely be hiked by another 25bp to 4 percent,” Trinh Nguyen, economist at banking giant HSBC said in report.

    Nguyen said HSBC analysis shows that either a 25bp of the SDA or both the 25bp hike of the SDA and RRP is the most cost-effective and impactful policy maneuver for the central bank.

    The economist said that the BSP is an inflation-targeting central bank, which means that it will have to ensure CPI slows to the upper bound of its 2 percent to 4 percent inflation target range for 2015.

    She noted the 4.9 percent year-on-year August inflation print is high, but slightly below consensus expectations and within the lower bound of the BSP’s recently revised estimate of 4.7 percent to 5.5 percent.

    Taking away the perceived “weaker” August print, headline inflation is still high enough to warrant further action by the central bank, she said.

    “Food inflation surged ahead to 8.3 percent year-on-year in August, up from 8.2 percent in July. With about a quarter of the total population living below the poverty line and food inflation 39 percent of the CPI basket, we expect the BSP to tighten monetary conditions to anchor inflation expectations,” Nguyen added.

    Rahul Bajoria, economist at UK-based investment bank Barclays believes that upside risks to inflation remain, which provide a bigger challenge for the BSP in keeping the inflation rate within its target band in 2015.

    “We expect the BSP to increase rates by another 25bp at its next policy meeting in September, possibly also accompanied by an SDA rate increase,” he said.
    Bank of the Philippine Islands lead economist Emilio Neri Jr. and associate economist Nicholas Antonio Mapa both said the BSP may hike both RRP and SDA rates because of high inflation rate as of August.

    “As long as the inflation rate remains significantly higher than next year’s target band, the signal that they [BSP] have to send to the market is that they are seriously addressing it with the appropriate monetary policy,” Neri said.

    For his part, Mapa explained that the next steps the central bank will be taking represent the return to “proverbial monetary normalcy” after years of accommodating the burgeoning domestic economy.

    He said the BSP’s efforts have been credited for helping fuel a boom in household final consumption expenditure and investments related to consumption, such as cars and condominiums. But with the domestic economy apparently gathering enough momentum in the second quarter to withstand another round of hikes, the BSP must return to holding position well-ahead of the much-anticipated 2015 Fed rate hike cycle.

    “What we can be sure of is that the BSP needs to get back to normalcy before the end of year, with the official end of the Bernanke-era QE [quantitative easing]just around the corner, in order to prime the BSP for the inevitable Fed hikes in 2015” he said.

    Meanwhile, Justino Calaycay, analyst at the Accord Capital Equities Corp. said the 6.4 percent second quarter gross domestic product growth has shown the potential of the economy to return to the planned trajectory.

    “This perspective lends support to bets the BSP may decide to tweak the rates yet another 25 basis points. The geopolitical tensions in Ukraine and Iraq, not to mention the uneasy stand-off in the Gaza Strip, keeps external risks heightened,” he said.

    On other hand, Dr. Victor Abola of the University of the Asia and Pacific said: “The BSP should not do anything with inflation being driven by supply constraints, but in case they do, it will probably be a 25 bps increase in policy rates.”

    Taking a slightly different view, ING Bank Manila senior economist Joey Cuyegkeng said that the central bank may keep its benchmark rates steady at 3.75 percent and 5.75 percent but may hike the SDA rate to 2.50 percent.

    “With a more moderate inflation report relative to the worse case market view, monetary tightening may not be quite aggressive. I expect an SDA rate hike of 25bps. We are not ruling out the possibility of a RRR hike to replace any SDA hike,” he said.



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