Banks see BSP keeping rates steady

MANILA, Philippines - Bank analysts have supported the central bank’s decision to hold fire last Thursday, but are divided on what it may do next with only three meetings left this year.

In separate reports last week, Barclays and Bank of the Philippine Islands (BPI) said the Bangko Sentral ng Pilipinas (BSP) made the correct decision by keeping policy rates at record-lows last week.

The BSP’s policymaking Monetary Board left unchanged the 3.5 percent overnight borrowing and 5.5 percent overnight lending rates – banks’ benchmarks in pricing their loans – already in place since October last year.

“Monetary policy was appropriate given the current macroeconomic conditions and that the current monetary policy stance was still supportive of non-inflationary growth,” BPI economists Emilio Neri Jr. and Nicholas Antonio Mapa said.

“This effectively allows the BSP to continue to provide the economy with a stable financial environment to bolster the robust growth the Philippines has been enjoying,” they added.

For her part, Barclays economist Prakriti Sofat said the decision was “expected” by market participants, together with a verdict to hold steady the special deposit account (SDA) rate after slashing it thrice this year.

Returns on SDAs – parked funds by banks and trust departments with BSP – were cut by 50 basis points each in January, March and April as the central bank looked at pushing out trillions in funds to the financial system.

“This was expected, given the recent cautiousness towards further SDA rate cuts expressed by BSP officials,” Sofat said.

“Comments by (BSP) Deputy Governor Nestor Espenilla Jr. on July 22 appear to have explicitly ruled out a further reduction in the near term, with the BSP preferring to wait for the impact of earlier cuts to filter through,” she added.

Aside from cutting SDA rates, the central bank has also ordered trust entities to remove from the facility investment management accounts (IMA) – funds held by Banks see… singular persons for investments managed by trusts.

Espenilla has said trusts have begun winding down their IMA holdings by a total of 30 percent this month and are expected to phase them all out by Nov. 30 this year.

Sofat said Barclays now sees no further cuts on the SDA rate this year, a revision from originally expecting another 50-basis point reduction. She reasoned out that slashing the SDA rate anew would “lead to upward pressure on asset prices.”

But Neri and Mapa said a 25-basis-point cut on the SDA yield could still not be ruled out since the new inflation forecasts for this year to 2015 are still within the BSP’s target range for the period.

The BSP raised its 2013 and 2014 inflation projections to 3.3 percent and four percent from 3.1 percent and 3.6 percent, respectively. For 2015, consumer prices may rise by an average of 3.5 percent.

The central bank has a three- to five-percent target this year and next, and two- to four-percent for 2015.

“BSP may still be compelled to lower the SDA rate within the year to 1.50 percent, allowing the monetary authority leeway to deal with potential surges in portfolio inflows and bringing the interest rate corridor into full-symmetry,” Neri and Mapa explained.

Nonetheless, both Barclays and BPI forecast no further changes on the policy rates in 2013.