Analysts find inflation, liquidity still a risk
Despite the central bank’s decision to pause its tightening cycle at its latest meeting on Thursday, analysts believe that achieving next year’s inflation target and mopping up excess liquidity in the financial system remain key concerns for monetary authorities.
As a result, private analysts expect the Bangko Sentral ng Pilipinas (BSP) will keep its policy rates steady up to the end of 2014, but anticipate it will eventually start raising the rates again by 2015.
HSBC economist Trinh Nguyen said in a report that in the medium term, achieving its inflation-targeting mandate remains a concern for the central bank.
Nguyen noted that starting next year the BSP’s inflation target will be narrowed to a range of 2 percent to 4 percent.
“January and February tend to be months with low price pressures, assuming no major supply shock. However, we believe headline inflation will spike above the BSP’s target in March 2015, forcing the central bank to raise rates further,” she said.
The HSBC economist concluded that the BSP may raise the interest rates for special deposit account as well as for overnight lending and borrowing by 50 basis points in the first half of 2015.
Meanwhile, analysts at the Singapore banking giant DBS said that the central bank’s Thursday decision does not necessarily mean that it is completely done with its policy tightening.
“The gross domestic product-inflation dynamics will remain the key focus. But the BSP is also likely to emphasize strengthening the domestic financial market, which was clearly the idea behind the recent increase in minimum capital requirements for local banks,” the analysts stated in a Group Research note.
The DBS analysts believe that there are still pockets of the economy that the BSP is not fully comfortable with, and liquidity in the financial system is one of them.
In August, the country’s money supply reached P7.1 trillion, growing by 18.5 percent year-on-year in because of the sustained demand for credit in the domestic economy.
Because of this, the analysts said further upward adjustment in the special deposit account (SDA) rate may be warranted going into next year even if the key policy rate is likely to be stable at 4 percent until at least the end of the first half of 2015.
At present, the rate for the overnight borrowing, or reverse repurchase facility stands at 4.0 percent and the rate for overnight lending, or repurchase facility remains at 6.0 percent.
The interest rate for SDA is at 2.50 percent, while the reserve requirement ratio for commercial banks was maintained at 20-percent after the Monetary Board meeting earlier this week.