StanChart sees BSP keeping rates steady for rest of 2015

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Standard Chartered Bank said the central bank is likely to keep its interest rates steady for the rest of 2015 given a benign inflation outlook for next year and expected stable financial conditions over the next 18 months.

“We currently expect no changes to the reserve repurchase rate and the SDA [special deposit account]rate for the rest of this and next year. This is a non-consensus call as many analysts are calling for rate hikes next year,” Jeff Ng, economist at StanChart, said in a research note.

Since September last year, the Bangko Sentral ng Pilipinas (BSP) has kept its key policy rates for overnight borrowing—or the reverse repurchase (RRP) facility —at 4 percent while the rate for overnight lending—or the repurchase facility—has remained at 6 percent.

The SDA rate and the reserve requirement ratio (RRR) for banks have also been frozen at 2.50 percent and 20 percent, respectively


Recent developments in oil prices and inflation support the bank’s latest view, the economist said.

StanChart noted that Brent prices have fallen to $56 per barrel from $62 per barrel at the start of the month.

“While we still expect oil prices to rebound, we now expect a modest pace of rebound in oil prices,” Ng said.

The bank now expects oil prices to average at $64 per barrel in 2015 and at $83 per barrel in 2016, lower than its previous forecasts of $76 and $100, respectively.

Meanwhile, StanChart said inflation could trend downward further in the third quarter on a year-on-year basis before bottoming out in the fourth quarter.

“Food inflation is likely to stay muted. Retail prices of major food commodities have been stable recently, even decreasing slightly for some items—this has reflected in inflation numbers as well,” the economist said.

However, the bank noted that low inflation is not likely to be sustained as it sees a modest rebound from the fourth quarter, as base effects turn unfavorable.

The BSP projects full-year inflation for 2015 at 2.1 percent, slightly gaining pace to average at 2.5 percent in 2016.

On the other hand, StanChart said financial stability in the Philippines has not deteriorated even with global volatility.

Loan growth has been slowing in line with nominal gross domestic product growth, largely due to falling corporate loans, while loan growth in the utilities and construction sectors has been normalizing since showing robust growth of 30 percent to 40 percent year-on-year in 2014, it said.

Meanwhile, loan growth in the manufacturing and mining sectors remains stable, it added.
In contrast, the bank noted that household loan growth has been robust in 2015, coming in at 20.1 percent year-on-year in April, after accelerating in 2014.

“This was partially led by auto loans due to strong motor vehicle sales. In our view, strong household loan growth reflects positive consumer sentiment and healthy domestic household consumption growth,” Ng said.

StanChart said it is optimistic that the Philippines will remain an outperformer across Asia this year.

“This lessens the likelihood that the BSP will need to cut policy rates to support growth,” Ng said.

The bank said domestic household consumption should continue to be supported by improving labor market fundamentals and steady remittance inflows.

“The unemployment rate was lower, at 6.4 percent in April 2015 compared to 7 percent a year ago, which should boost consumer spending particularly on discretionary items,” it said.

“Remittance inflows remained resilient in the first quarter, despite a weak January print,” the economist said.

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