BSP seen to keep rates steady if Apr inflation falls below 4%

MANILA, Philippines - London-based investment bank Barclays Capital sees the Bangko Sentral ng Pilipinas (BSP) keeping its interest rates steady if inflation for the month of April falls below four percent.

Barclays Capital regional economist Prakriti Sofat said the BSP would likely leave its overnight borrowing rate and overnight lending rate unchanged if April inflation comes in at four percent or under.

“Our sense is that if April inflation comes in at four percent or under then the BSP may use it as a reason to stand pat,” Sofat said.

She pointed out that Barclays Capital expects inflation for the month of April to average at 4.4 percent while the BSP sees inflation ranging between 3.7 percent and 4.7 percent.

The economist pointed out that Barclays Capital expects the BSP to raise interest rates by 25 basis points today and another 25 basis points in July due to the continued build up in inflation pressures amid the escalating global oil and food prices.

After today, the BSP is scheduled to hold policy rate setting meetings on June 16 and July 28.

“Our base case remains for the BSP to raise the policy rate by 25 basis points to 4.5 percent and by a further 25 basis points in July given the upward trend in inflation,” she said.

The BSP raised interest rates by 25 basis points last March 24 as a preemptive move to keep inflation expectations well anchored amid the escalating prices of oil and food in the world market. This brought the overnight borrowing rate to 4.25 percent and the overnight lending rate to 6.25 percent.

The BSP has set an inflation target of between three percent and five percent this year until 2014. However, it has raised its inflation forecast to the closer end of the target instead of 4.4 percent this year but lowered next year’s forecast to 3.4 percent from 3.5 percent.

Sofat explained that Barclays Capital sees inflation averaging 4.8 percent this year despite exceeding the higher end of the target in the middle of the year.

“We continue to expect headline inflation to average 4.8 percent in 2011, above the BSP forecast of 4.4 percent and just shy of the top-end of its three percent to five percent target band. However, we expect headline inflation to cross five percent by the middle of the year, “ the economist said.

Inflation averaged 4.1 percent in the first quarter of the year, slightly lower than the 4.2-percent average in the same quarter last year.

She warned that keeping interest rates unchanged today would indicate that the BSP is behind the curve in terms of monetary policy.

“A pause by the central bank could create some market concerns that the BSP is falling behind the curve,” she added.