HSBC sees BSP keeping interest rates steady

MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) believes that the Bangko Sentral ng Pilipinas (BSP) would not raise interest rates down the line and instead focus on other monetary tools such as further raising the reserve requirement ratio for banks to quell inflationary pressures.

HSBC head of treasury operations Arnulfo “Wick” Veloso said in a press conference that monetary authorities could use other monetary tolls to sterilize unwanted domestic liquidity brought about by strong foreign capital inflows to emerging market economies including the Philippines.

“The cheapest way for BSP to manage excess liquidity is to increase the reserve requirement to encourage growth. This is an extra ordinary situation wherein foreign capital continue to flow to the Philippines,” Veloso stressed.

The BSP’s has so far raised interest rates by 50 basis points to keep inflation expectations well anchored amid escalating oil and commodity prices. The central bank raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 bringing the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

The body decided to keep interest rates unchanged during the policy-rate setting meetings last June 16 and July 28 but decided to raise the reserve requirement for banks to 21 percent from 19 percent to curb additional inflation pressures arising from excess liquidity. The twin move is expected to siphon off close to P70 billion in excess liquidity from the local financial system.

Veloso told reporters that the decision of the BSP to siphon off excess liquidity from the financial system that could potentially push inflation above the central bank’s three percent to five percent target shows the reluctance of monetary authorities to further adjust key policy rates.