Key BSP rates to hold up until 2014 – DBS

MANILA, Philippines - The Bangko Sentral ng Pilipinas is expected to keep rates steady until the second quarter of next year, Singapore-based DBS said.

This, as inflation remains manageable and amid the country’s favorable external balances, the bank said in its quarterly report published Friday.

“From a price stability standpoint, there is again no urgency for the central bank to hike rates. Despite multiple quarters of strong GDP (gross domestic product) growth, inflation has been trending lower,” DBS said.

“Stable food prices and depressed commodity prices have gone a long way towards keeping a lid on headline inflation. Barring an upward shock to these two components, a mild updrift in CPI (consumer price index) is expected as the global recovery gains traction, eventually translating into higher commodity prices,” DBS continued.

Inflation has averaged 2.8 percent in the eight months to August, below the central bank target range of 3 to 5 percent for the year. The level is also below the BSP’s forecast of 3 percent.

At the same time, DBS noted credit expansion may grow in the next few months as funds being flushed out of the central bank’s special deposit accounts find their way into the financial system. This may stoke inflation in the coming months, but DBS pointed out the rise in consumer prices is expected to remain manageable.

“We maintain that inflation will average 3.1 percent in 2013 before rising to 4.1 percent in 2014. Monetary tightening to regulate credit/inflation levels is likely to take place only in 2Q14 (second quarter of 2014),” DBS said.

The BSP’s Monetary Board, in its latest policy meeting on September 12, kept rates steady amid benign inflation and ahead of a US Federal Reserve meeting next week.

Overnight borrowing and lending rates were maintained at 3.5 percent and 5.5 percent, respectively.

DBS also noted the central bank can continue leaving rates unchanged because of the country’s current account surplus.

“Monetary policy is not constrained and the overnight borrowing rate can stay low in the coming quarters. Most importantly, external balances are not pressured by speculation of Fed tapering,” DBS said.

DBS noted that in the past few months, Indonesia and India have been seen tackling external funding concerns due to their worsening current account deficits. Moreover, countries with a balanced current account such as Thailand and Malaysia were also affected.

A current account deficit means the country is a net borrower to the rest of the world, as it has received less payments for its exports compared to the payments it made for its imports.

“While asset prices in Philippine also took a tumble, external funding is not an issue for the economy given the current account is expected to remain in surplus position in excess of 2 percent of GDP this year,” DBS said.

“The sizable surplus has been maintained over the past six quarters even as exports went sideways and this was largely due to continued inflows from remittances,” DBS added.

The current accounts is a component of the balance of payments, which indicates a country’s transactions with the rest of the world.

The Philippines saw a balance of payments surplus of $3.677 billion in the seven months to July, latest data from the BSP showed. The balance of payments surplus is expected to hit $4.4 billion by year-end, below last year’s $9.236 billion.

The Monetary Board has kept rates steady since the start of the year, citing manageable inflation and robust economic growth. It will revisit policy settings next on October 24 and December 12.