Citi sees Asian banks keeping rates steady

MANILA, Philippines - US-based Citigroup sees central banks in the Asia Pacific region including the Bangko Sentral ng Pilipinas (BSP) keeping interest rates steady until the end of the year amid the possible exit of Greece from the Eurozone as well as the economic slowdown in China.

In a report Citigroup said the likelihood of a “Grexit” scenario and the broad-based economic slowdown in China have raised growth concerns.

The investment bank pointed out that most Asian central banks are expected to keep interest rates on hold this year.

“We have not made any major changes to our monetary policy calls in Asia, and believe the case for cutting rates at this juncture is far from clear. Our base case scenario is that almost everyone in Asia is keeping interest rate or monetary policy stance unchanged this year,” Citigroup said.

It pointed out that most Asian central banks could start tightening their monetary policy stance starting 2013 as the interest rates are already historically low, core inflation expectations are stickier.

The BSP has so far slashed interest rates by 50 basis points this year due to benign inflation outlook as well as fragile global economic growth. This brought the overnight borrowing rate back to a record low of four percent and the overnight lending rate to six percent.

The BSP, however, decided to keep interest rates unchanged last April 19 to assess the impact of the 25 basis point rate cut last Jan. 19 that was followed by another 25 basis point reduction last March 1.

The next policy rate setting meeting of the Monetary Board is scheduled on June 14.

“Hurdles still remain high for many central banks in Asia to ease because data have not been that bad, especially domestic demand indicators, and core inflation has been sticker; factors that prompted Thailand and Philippines to ease in the last six months have reversed course,” Citigroup said.

However, the central bank of Vietnam would cut rates by 300 basis points while China would slash the reserve requirement ratio by 100 basis points this year. India would also reduce interest rates by 25 basis points.

“We think, by most accounts, Vietnam and China still have ample room to more aggressively use monetary easing tools, especially the latter. We think Korea and Thailand are potential candidates as well, and are at the margin, more likely to consider easing than Malaysia or the Philippines,” the investment bank said.

Citigroup said the BSP would likely undertake liquidity easing by loosening the special deposit account (SDA) and reserve requirement facilities.

The investment bank said external event risk with potential to abruptly elevate expectations might compel conservative consumption choices and may set off an inventory de-stocking response as well as delays in investment plans.

“We anticipate the fiscal spending bias to persist in this environment, coupled with an overnight policy rate stance unchanged at a record low of four percent,” Citigroup said.