BSP seen tightening policy stance in H2

MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) expects the Bangko Sentral ng Pilipinas (BSP) to further tighten its policy stance in the second half of the year due to rising inflation despite the decision of monetary authorities to keep interest rates unchanged last Thursday. HSBC economist Sherman Chan said in a research note said that the central bank would likely raise interest rates during their next policy rate setting meeting scheduled on July 28.

Chan pointed out that HSBC sees consumer prices accelerating and breaching the higher end of the BSP inflation target of three percent to five percent in the coming months before peaking on October.

“This should keep the BSP in a tightening mood through the second half of the year. Barring any deterioration in the external environment that could dampen the Philippine economic outlook, the BSP may resume policy rate hikes at the next meeting,” she said.

The BSP decided the other day to keep interest rates steady due to lower-than-expected inflation last May but decided to raise the reserve requirements for banks by one percentage point to 20 percent from 19 percent starting June 24 as a preemptive move to counter any additional inflationary pressures from excess liquidity.

“The BSP went against market consensus by putting the policy rate on hold. However, this decision should not be interpreted as a sign that the BSP has become lax in the fight against inflation. In fact, the call was not a surprise to us, given the much weaker-than-expected inflation reading for May, which gave the central bank leeway to hold fire this time and reassess the economic outlook especially amid rising external uncertainties, which may have already taken a toll on remittances,” Chan said.

Inflation kicked up to a 13-month high of 4.5 percent last May from the revised 4.3 percent last April but was well below the market expectation of above five percent.

This prompted HSBC earlier to slash its inflation forecast for this year to five percent instead of 5.4 percent. It lowered its inflation forecast to 4.6 percent from 5.2 percent in the second quarter, to 5.6 percent from 6.2 percent in the third; and to 5.7 percent from 5.9 percent in the fourth quarter due to the lower-than-expected inflation last May.

It would be recalled that the central bank raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 to keep inflation expectations well anchored amid the escalating price of oil in the world market. This brought the overnight borrowing rate to 4.5 percent and the overnight lending rate to 6.5 percent.

She explained that HSBC still expects the BSP to raise interest rates by another 75 basis points this year bringing the overnight borrowing rate to 5.25 percent and the overnight lending rate to 7.25 percent.