Policy rates likely to stay unchanged


The Monetary Board (MB) will likely keep key interest rates unchanged on Thursday, analysts said, with little need to tweak policy at this point as inflation is picking up and economic growth is gaining momentum.

In a research note, banking giant HSBC noted that the MB decision would be released just 13 hours after an expected US interest rate hike announcement by the Federal Open Market Committee (FOMC).

Both the MB – the Bangko Sentral ng Pilipinas’ (BSP) policymaking body – and the US Federal Reserve’s FOMC will be holding their final policy meetings for the year on December 17 and December 15-16, respectively.

“With such coincidental timing, the BSP is unsurprisingly constrained in terms of its course of action,” HSBC economist Joseph Incalcaterra said, adding that central bank has clearly indicated that it was comfortable with its current stance.

“We think it is unlikely to make any tweaks until the operational changes penciled in for the second quarter of 2016,” he said, referring to the planned implementation of an interest rate corridor.

Moreover, Incalcaterra said latest developments suggested that there was no need for policy changes. Liquidity is more than sufficient to support growth and the rise in consumer prices likely troughed in October. There will, however, be some upside risks to food prices given the ongoing El Nino, he said.

Inflation picked up in November, rising to 1.1 percent from a record-low 0.4 percent over the previous two months.

“Indeed, food prices jolted 1 percent month-on-month in October. But the most recent leg down in oil prices should help keep a lid on things for the foreseeable future,” the economist said.

From the economic growth angle, Incalcaterra said there was little to worry about.

He said the country’s gross domestic product growth of 6 percent in the third quarter indicated that a 5.5 percent forecast for 2015 would be achieved.

“While this may not appear stellar when compared with the government’s 7 percent to 8 percent growth target, it is nonetheless a solid performance in the context of decelerating growth elsewhere in the region,” the HSBC economist said.

Going forward, the bank expects growth to pick up slightly to 5.6 percent in 2016, with private consumption to stay strong throughout the election cycle scheduled for next year.

Incalcaterra said the challenge for the central bank would be communicating and planning for 2016 policy changes.

“As we have mentioned in the past, the implementation of an interest rate corridor with a spread of approximately 100 basis points will likely result in a cut to the policy rate,” he said.

The HSBC economist noted that monetary conditions could well be tighter next year if term deposit auctions resulted in an interest rate above the current special deposit account’s 2.5 percent.

“The latter is where most of the financial system’s excess liquidity is stored,” he said.

“What’s more, any outflows following the Fed’s decision – assuming it raises rates – will result in incrementally tighter liquidity conditions, which the BSP will need to take into consideration as it formulates policy,” he continued.

Fortunately, the economy’s relatively strong fundamentals should prevent any significant outflows, Incalcaterra said.

Despite some challenges for the Philippines over the coming months, indicators nonetheless suggest the economy is holding up well, he added.

With this, Incalcaterra said the central bank could continue to tolerate a slightly weaker currency in order to ensure that the domestic manufacturing sector would not face any additional competitive pressures.

“In short, we see the BSP on hold for now, but Philippines monetary policy observers will have much to look forward to come 2016,” he said.

London-based research consultancy firm Capital Economics, meanwhile, also said the central bank looked almost certain to keep its main policy rate on hold at 4 percent given that the economy was regaining momentum.

“Earlier in the year, a key concern for policymakers was the slowdown in the economy, but with growth rebounding to 6 percent year-on-year in the third quarter, those fears have largely dissipated,” Capital Economics Asia economist Gareth Leather said.

The jump in inflation to 1.1 percent in November from 0.4 percent in October, meanwhile, should help to banish lingering fears over deflation.

“The country’s large current account surplus means Fed tightening shouldn’t pose a major threat to the country’s financial stability, which means the BSP will be in no rush to follow the Fed in hiking rates,” Leather added.

Singapore-based bank DBS also said there would be no policy rate move before the shift to the new interest rate corridor.

The system, scheduled to start during the second quarter of 2016, involves the establishment of two liquidity facilities – deposit and lending – whose rates will form a corridor around the central bank policy rate. These will also be supported by auction-based monetary operations.

United Kingdom-based investment bank Barclays, lastly, said the central bank would remain on the sidelines this week, having done so for the year.

“Even with the pickup in inflation, BSP appears comfortable with its policy stance, emphasizing that growth and inflation risks stem largely from poor weather and the uncertain global backdrop,” it noted.


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