AFTER APRIL’S 2.2% INFLATION, ANALYSTS EXPECT:

‘BSP to study liquidity tool, keep rate stance’

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THE low inflation environment in the Philippines as affirmed by April’s 2.2 percent rate may prompt the central bank to keep its policy stance steady while it studies the merits of adopting a similar term auction facility (TAF) as that of the US Federal Reserve, when it addressed banks’ aversion to risk during the last global financial crisis.

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The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) is set to hold its next policy meeting on May 14, during which the board may discuss the possibility of introducing the program to the local financial markets, an analyst at the Bank of the Philippine Islands (BPI) said.

“We do not expect any change in monetary stance at the May meeting of the BSP. Perhaps they would be able to comment further on planning the term auction facility,” BPI associate economist Nicholas Antonio Mapa told the Manila Times.

TAF is a liquidity tool used by major central banks as a means of better managing money supply in the financial system. The US Fed used it as a temporary program from 2007 to 2010 designed to “address elevated pressures in short-term funding markets.”

“It would be best if the BSP can get this off the ground prior to the volatility that is projected to beset markets once the Fed needs to normalize its monetary policy,” Mapa said.

Of a similar view is Patrick Ella, economist at Security Bank Corp., who said the central bank is likely to have no action on policy rates but “will give more clarity on some liquidity issues, as what they recently discussed.”

Late last month, the Philippine central bank warned of some volatility in the domestic financial markets in the days following the US Fed’s move to leave open its timeframe for a market-anticipated interest rate hike.

The BSP said domestic financial markets will continue to look for signs on the timing of the Fed’s policy rate hike.

“So during this time when data seems to suggest that the Fed has room to delay its action, we can expect some volatility, as those who have positioned themselves for an early Fed hike reassess their next steps, while those who have held off, may continue to proceed with caution,” BSP Governor Amando Tetangco Jr. was quoted as saying at the time.

Reasons to freeze
Other analysts polled by The Manila Times have a consensus that the Monetary Board will maintain the current rates for overnight borrowing, or reverse repurchase (RRP) facility, at 4 percent, and the rate for overnight lending, or repurchase facility, at 6 percent.

BPI Vice President and lead economist Emilio Neri Jr. expects the central bank to be aware that disinflation is partly due to transitory factors.

“They would not want to cut policy rates either if they’d be forced to take that back later on in the event the US Federal Reserve decides to hike its policy rates,” he said.

Neri, however, pointed out that a noticeable slowdown in domestic liquidity, or M3, and bank lending growth could compel the monetary authorities to consider cutting the reserve requirement in forthcoming meetings.

Mabellene Reynaldo, analyst at Metrobank Research, sees the central bank’s policy rates remaining steady until the end of the year given the low inflation outlook.

The BSP’s inflation outlook for 2015 is for 2.2 percent, or a target range of 2 percent to 4 percent.

Justino Calaycay Jr., Accord Capital Equities Corp. analyst, sees the Monetary Board delaying action on the rates at the May 14 meeting and opting, instead, to wait for data on gross domestic product (GDP) for the first quarter, set for release late this month.

Calaycay said the BSP will make sure that growth has been restored to its trajectory following the “slow” first three quarters of 2014 and the robust 6.9 percent in the fourth quarter.

“If the latter is sustained, or the number is resting at least above 6 percent, there may be no reason for the BSP to tweak rates even at its next meeting,” he said.

The analyst stressed that the 2.2 percent inflation for April gives two hints: there is little danger of any inflationary pressure, thus, easing upward pressures on rates; which invariably leads to whether consumers are spending enough.

“If the answer to the latter veers toward the negative, then there may be a reason to tweak rates (but in the opposite direction.) As things stand today, however, none of these reasons exists so the BSP will remain prudent in managing liquidity,” he said.

Victor Abola, economist at the University of Asia and the Pacific, said the policy rates and all other instruments are likely to be kept at their present levels.

“This is because this [BSP] is a very conservative central bank, which dissociates itself from the economy’s output and employment goals,” he said.

The central bank last week affirmed its monetary policy stance after reporting headline inflation hit its slowest pace in 20 months in April at 2.2 percent, well within its forecast range.

BSP Governor Amando Tetangco Jr. stressed the inflation figures for April show that the central bank’s current policy stance based on its outlook of manageable inflation remains appropriate.

“We will, nevertheless, remain watchful of developments, especially the Fed actions and global market interpretations of such actions, how the interaction of these two factors are absorbed by our own financial markets and how domestic economic agents use these to shape their inflation expectations,” he said.

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