PH to still top SE Asian growth despite BSP tightening – BPI


Further rate adjustments seen through end-2015

The Philippines will continue to outperform its Southeast Asian neighbors in terms of economic growth this year despite entering a monetary policy tightening cycle set into motion by the central bank, economists from the Bank of Philippine Islands (BPI) said.

They said in a weekend research report that even with higher interest rates, they expect the country’s gross domestic product (GDP) growth to be among the fastest in the Asian region at 6.2 percent in 2014 and at 6.5 percent in 2015.

“The business community is probably more worried about the impact of an impending power shortage than the prospect of further BSP tightening given the economy’s still strong external position and still favorable domestic financial conditions,” economists Emilio Neri Jr. and Nicholas Antonio Mapa said in the latest BPI Economics and Financial Markets Research report.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP), citing signs of inflation pressures, last week raised its two key policy interest rates by 25 basis points each after giving several hints in recent months that it was ready to tighten monetary policy if the situation called for it. The BSP had kept the rates steady since October 2012.

The new rate for overnight borrowing, or reverse repurchase (RRP) facility, now stands at 3.75 percent, up from 3.5 percent. That for overnight lending, or repurchase facility (RP), is now at 5.75 percent, up from 5.5 percent previously.

The BSP, however, kept special deposit accounts (SDA) rate unchanged at 2.25 percent while also maintaining the banks’ reserve requirement ratio (RRR) at 20 percent.

More rate hikes likely
The BPI analysts said the central bank’s decision to raise the key rates is likely be followed by further rate adjustments through end-2015 “which are not expected to have a worrisome impact on Philippine output growth.”

The analyst said they see a further 75-basis point (bps) rise from an original 50 bps cumulative increase in the SDA and RRP rate through end-2015 but, like the July 31 decision, “will continue to be very orderly adjustments to the gradual normalization of monetary policy in the west.”

“This should prove to be a sharp contrast to the abrupt and destabilizing variety that we have seen and still expect to see from the sizeable tightening moves elsewhere in Emerging Market space,” they said.

Finally, the analysts do not see any additional RRR hikes, as M3 growth is expected to decelerate to more normal growth rates of 15 percent to 20 percent before the end of 2014 due to base effects and recent tightening measures.

As of June, growth in the country’s money supply eased further amid the implementation of the central bank’s macroprudential measures to mop up excess liquidity from the financial system and keep inflation at bay.

Domestic liquidity, or M3, rose 23 percent in June from the year-earlier level, bringing the total amount of cash and cash-equivalent securities circulating within the economy during the period to P7.1 trillion, a deceleration from the 28.4 percent increase recorded in May.


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