BSP seen raising rates by 50 basis points this year

MANILA, Philippines - UK-based investment bank Credit Suisse sees the Bangko Sentral ng Pilipinas (BSP) raising interest rates by 50 basis points this year with the first adjustment taking place as early as next month as inflation pressures continue to build up on the back of a sharp rise in global commodity prices.

In a report, Credit Suisse vice president for emerging markets economic research Devika Mehndiratta said that the BSP is expected to adjust its key policy rates in the second quarter but a rate hike next month could not be ruled out.

“BSP is getting closer to raising rates; now a hike next month can’t entirely be ruled out. In an attempt to ensure that inflation worries don’t get embedded in market psyche, the BSP could toy with the idea of doing a token hike sooner rather than later (even if it may decide to thereafter pause to ‘wait and watch’),” Mahndiratta stressed.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009, bringing the overnight borrowing rate to a record low four percent and the overnight lending rate at six percent.

Authorities kept interest rates at record lows for 14 straight policy setting meetings since July 2009 due the benign inflation outlook.

“We expect the BSP to adjust its inflation forecast for 2011 and this upward revision by the central bank should be some sort of a relief to market participants. The recent sharp hike in global commodity prices and the sooner than expected hike in transport fares had suggested an upside to our (4.1 percent) and consensus estimates (4.2 percent) for 2011 average inflation — so at least as far as inflation projections go, BSP’s latest projection of 4.4 percent, is no longer behind-the-curve,” the Credit Suisse official stated. 

The next policy setting meeting of the BSP is scheduled on March 24.

The investment bank added that it is also closely monitoring liquidity in the Philippines as funds parked in the BSP vault in the form of special deposit accounts (SDAs) stood at more than P1.2 trillion.

“Besides inflation, another thing worth keeping an eye on is liquidity, in our view. Banks are swimming in liquidity and are parking these surplus funds to the tune of about P1.2 trillion at the SDA with the central bank,” it said.

The country’s domestic liquidity posted a double-digit growth of 10.6 percent as of end-December last year as the Philippines booked its strongest economic expansion in over three decades.

Data released by the BSP showed that the country’s domestic liquidity or M3 amounted to P4.396 trillion as of end-December or P425 billion more than the P3.973 trillion recorded of as end-December of 2009.