Central bank to hold policy rates – analysts


The Bangko Sentral ng Pilipinas (BSP) is likely to retain current policy rates given the flush liquidity, favorable economic conditions and manageable inflation rate, private analysts said on Wednesday.

They said 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.

Most of the analysts did not mention changes in the 2.50 percent interest rate for the special deposit account (SDA) and the 20-percent reserve requirement ratio (RRR) for banks.

ING Bank chief economist in Asia, Tim Condon, forecast a no-change outcome in the Monetary Board meeting last Tuesday and he traced his projection from BSP Governor Amando Tetangco Jr.’s recent statement that “current economic conditions do not appear to warrant additional stimulus from monetary policy.”

“The BSP and Malaysia’s BNM [Bank Negara Malaysia] are Asia’s King Canutes, resisting the tide of policy interest rate cuts. Of the two we consider the BSP the more likely to hold the line,” he said.

HSBC economist Trinh Nguyen also expects policy rates to stay on hold but noted that Tetangco hinted at some operational changes ahead, likely regarding the RRP.

“We believe rates will remain unchanged at the upcoming meeting. In the months ahead, the BSP will try to streamline its main policy rate–the reverse repurchase rate–to make it more effective,” she said.

Nguyen said the Monetary Board considered the current condition of the country’s economic growth and the inflation outlook.

“The disappointing January export and remittance data alone will unlikely cause the BSP to change its monetary stance. Seasonal distortion is one reason. Offsetting factors, such as inflows, flush liquidity, higher fiscal spending, rising BPO [business process outsourcing]sector growth, and savings from oil, should also help to ease growth concern,” she said.

The HSBC economist also believes a potential currency weakness and unpredictable weather will keep the BSP vigilant.

Nguyen said a longer-term concern for the BSP would be excess liquidity, rather than a shortage.

“By any measure, the financial sector is flush with cash. Even with the rapid growth of lending, there is still plenty of excess liquidity left, fuelling demand for safer assets, such bonds. Comments from BSP Governor Tetangco suggest that financial system risks are high on his mind,” she stated.

Sharing the same view are analysts from Singaporean banking giant DBS, who expected no rate move today by the central bank.

The DBS analysts said recent comments made by the BSP suggested that the overnight borrowing rate is not the best tool to manage the rebalancing process, hinting that no rate cut or hike is imminent.

The analysts said the BSP was also cautious over possible excesses in the financial system due to global rebalancing efforts.

“It seems clear to us that the BSP remains concerned about excess liquidity in the financial system. As such, the BSP is likely to stress the need to remain vigilant of excess liquidity in the financial system though,” they stated.

Bank of the Philippine Islands (BPI) associate economist Nicholas Antonio Mapa also sees the BSP maintaining its key policy rates.

Mapa said cutting policy rates would result in a weaker peso, while hiking the rates would mean losses for the BSP.

Patrick Ella, economist at Security Bank Corp., sees no change in policy rates despite the United States Federal Reserve hinting of a possible rate hike.

“No rush [for the BSP]to act as inflation is under control,” he said.

“We expect that the BSP will hold rates in March 26 meeting given low inflation expectations,” said Mabellene Reynaldo, research analyst at Metrobank research.

But Dr. Victor Abola, economist at the University of Asia and the Pacific, said that, while the BSP may retain its current policy rates, it may, however, cut the interest rate for SDA.

“I think MB may reduce SDA rate by 25 basis points, while retaining the policy rates at 44 percent and RR as well,” he said.

“This is to avoid currency appreciation which tends to attract money to already ‘hot’ financial markets and property market,” he said.


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