BSP seen raising policy rates in H2

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may raise policy rates by the second half of the year as strong growth drives inflation higher, the research division of investment bank Nomura Singapore Ltd said in a research note.

 â€œWe are less sanguine on CPI (consumer price index). We are expecting it to rise to 4.6 percent this year, leading the BSP to hike by 50 basis points in (second half),” Nomura said in a research note dated Feb. 28.

Economic growth could come in at 6.4 percent this year, slightly slower than the 6.6 percent growth last year, but is nevertheless within the official six to seven-percent target, the report added.

Nomura, which visited the country recently for an evaluation, said businesses are “oozing” with optimism for the Aquino administration, which had showed “strong leadership and unswerving focus” on good governance.

This optimism has translated to more investments, noting particularly in-roads on infrastructure spending as well as foreign direct inflows that could help boost growth more in the long run. It also took note of the upcoming senatorial elections as an “impetus” to growth.

As a result, inflation pressures may pick up later in the year, Nomura said. Inflation rose to three percent in January.

The central bank expects to cap inflation at three percent this year and 3.2 percent next year, both falling at the low-end of the target. Inflation for February, which is seen to settle between 2.8 and 3.7 percent, will be released today.

With “favorable economic conditions,” Nomura said the central bank is grabbing the “opportunity” to strengthen its oversight functions of monetary and financial stability by unveiling reforms.

It cited, among others, restrictions to foreign inflows and rate cuts made to its special deposit account facility and the study being conducted on the interest rate corridor which are both aimed at managing liquidity pressures.

 â€œA longer-term objective for the BSP is to strengthen its capital position… The BSP wants the government to strengthen its capital position, allow it to issue its own debt securities…, and introduce a fairer allocation with the government for its financial gains/losses,” Nomura explained.

Macroprudential measures could also be in the works, Nomura pointed out, this time targeted at the property sector on fears asset bubbles may be forming.