HSBC, Nomura see BSP keeping rates steady

MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) and Nomura Securities of Japan believe that the Bangko Sentral ng Pilipinas (BSP) would keep interest rates steady despite the slower-than-expected economic growth posted in the third quarter of the year due to weak global trade and government underspending.

HSBC economist Trinh Nguyen said in a report that the BSP would likely hold interest rates steady during the last policy rate setting meeting of the Monetary Board for the year scheduled on Thursday.

“This will be a difficult decision for monetary officials when they meet on Dec. 1 for their last meeting of 2011. As mentioned previously, the growth outlook and inflation pressures are equally challenging at the moment. That said, we expect the BSP to hold its policy rate steady,” Nguyen said.

The economist pointed out that the domestic demand outlook remains strong, inflationary pressures are too high and there is still a lot of liquidity in the system to support demand.

Philippine economic performance as measured by the gross domestic product (GDP) expanded by 3.2 percent in the third quarter of the year fom 7.3 percent a year ago, bringing the GDP growth in the first nine months of the year to 3.6 percent.

“With growth still above three percent year-on-year and expected to accelerate in fourth quarter due to increased government spending and remittances, the BSP has room to monitor inflationary pressures,” the economist explained.

Nguyen added that an interest rate cut by monetary authorities on Thursday would further escalate inflationary pressures without significantly boosting growth given elevated price levels.

“But there is a second argument why the BSP may wish to hold its fire for now: high inflationary pressures and excess liquidity. We believe monetary officials should relax, sit back, and hold their fire for the day that all else fails,” the HSBC economist said.

On the other hand, Nomura Securities said in its latest Asia Economic Alert the BSP would likely keep interest rates steady on Thursday.

Euben Paracuelles of Nomura Securities said the BSP would keep interest rates unchanged on Dec. 1 on the back of strong private demand and rising inflation despite the slower than expected GDP growth in the third quarter of the year.

“Against this backdrop of still strong private domestic demand and headline inflation running above five percent, we still think the BSP will likely keep its policy rate unchanged this week,” Paracuelles stressed.

The analyst said the outlook for private domestic demand also looks positive from the BSP’s perspective, as it reiterated its favourable remittances outlook despite the external environment, and its latest business sentiment survey suggested that private investment spending should remain buoyant.

The BSP interest rates by 200 basis points to a record low four percent for the overnight borrowing rate and six percent or the overnight lending rate between December 2008 and July 2009 to cushion the impact of the global financial crisis on the economy.