BSP seen keeping rates steady this year

MANILA, Philippines - London-based think-tank Capital Economics Ltd said it expects the Bangko Sentral ng Pilipinas (BSP) to keep its key policy rates steady at record lows this year on the back of benign inflation outlook despite the stronger-than-expected economic rebound of the country.

Capital Economics international economist Ashira Perera, in an economic update entitled “The Philippines is in no rush to lift policy rates,” said their view on policy rates that the Philippines would adjust its key policy rates this month appeared to have been too aggressive.

Perera pointed out that the rapid gain in investments is quickly lifting the capacity and would continue to keep demand-side inflation pressures subdued as possible food-supply disruptions would stay a wild-card.

“We have revised our view and now anticipate that the BSP will delay a policy rate hike until the first quarter of 2011,” she stressed.

Earlier, Capital Economics expected the BSP’s Monetary Board to adjust upwards its key policy rates next month after the country’s gross domestic product (GDP) posted a surprising growth of 7.9 percent in the first half of the year from 1.2 percent in the same period last year.

“Accordingly, we now anticipate that the policy rate will move up in the first quarter of 2011, rather than next month. We then expect rate hikes of 25 basis points every quarter to 5.0 percent by the end of next year,” Perera added.

Last Thursday, the BSP decided to keep its key rates unchanged for the 11th consecutive policy-setting meeting since July last year on the back of the benign inflation outlook. This pegged the overnight borrowing or reverse repurchase rate at a record low of four percent and its overnight lending or repurchase rate at six percent since July last year.

During the height of the global financial crisis, the BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 but introduced several liquidity-enhancing measures to cushion the impact of the global economic meltdown.

Aside from keeping its key policy rates unchanged, the BSP decided to scale down its inflation forecast to 3.5 percent instead of four percent this year and to three percent instead of 3.25 percent next year. The BSP has set an inflation target of 3.5 percent to 5.5 percent this year and three percent to five percent between 2011 and 2014.

The economist pointed out that the country’s strong economic rebound would be sustained and inflation risks would climb next year.

“All this suggests that the BSP will be on hold for a while although we continue to expect that rates will need to move up in 2011 to ensure that inflation stays below the target ceiling,” Perera said.

According to her, the country’s GDP would likely expand by 6.5 percent this year before slowing down to 5.5 percent next year. The Cabinet-level Development Budget Coordination Committee (DBCC) sees GDP expanding five to six percent this year and seven to eight percent next year.

“Meanwhile, the International Monetary Fund has just waded-in with a seven percent forecast for GDP growth this year. More importantly, we remain far above the consensus (and the IMF too) for 2011, when we anticipate that rapid GDP growth will prove to be far more durable than under what is now the mainstream view,” she said.

However, the think tank is not yet convinced that the seven to eight percent per annum expansion pace would be sustained between 2011 and 2016.

Perera warned that the strong appreciation of the peso against the dollar has been giving monetary authorities problems especially in coping with high capital inflows.

“Relative to elsewhere, the authorities in Manila remain at the relaxed end of the scale when it comes to currency appreciation concerns. But foreign exchange reserves are up which suggests some intervention has been going on,” she added.

Capital Economics sees the peso closing at P43 to $1 at the end of the year before strengthening further to 41 at the end of 2011.

Monetary authorities started to phase out liquidity enhancing measures that were implemented way back in November 2008 in light of the gradual global economic recovery. The Monetary Board decided to increase the rate on a short-term lending facility to four percent from 3.5 percent.

Other crisis-related measures that were tweaked included the reduction of the peso rediscounting budget to P40 billion and further to pre-crisis level of P20 billion from P60 billion, the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and the restoration the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.