Barclays, StanChart expect further monetary tightening

MANILA, Philippines - British banks Barclays and Standard Chartered Bank, in separate research notes, said they expect further monetary tightening actions from the Bangko Sentral ng Pilipinas to pull down liquidity growth.

Prakriti Sofat, regional economist at Barclays, said the hike in reserve requirement for banks implemented by the BSP on Thursday is a “step in the right direction” done to guard against risks to financial stability amid high liquidity growth.

“We believe further increases in banks’ reserve requirement – at least another 200 basis points – are likely over the coming three to four months,” Sofat said.

The BSP on Thursday kept key policy rates steady but decided to increase banks’ reserve requirement by one percentage point to reign in domestic liquidity growth which has stayed above 30 percent since July last year.

The expansion in M3, the broadest measure of liquidity, has been due to funds flushed out of the central bank’s Special Deposit Account after adjustments were made on the facility.

Aside from further tweaking the reserve requirement ratio, Sofat said the BSP is forecast to adjust key policy rates upward by a total of 50 basis points.

“We expect the BSP to raise the main policy rate, given the positive output gap and rising underlying inflationary pressures,” Sofat said.

“We continue to expect the central bank to hike the reverse repo rate by 50 basis points, to four percent, with a 25-basis point increase in the second quarter and another in the third quarter to ensure that inflation expectations remain anchored,” she added.

Overnight borrowing and overnight lending rates currently stand at 3.5 percent and 5.5 percent, respectively.

But Sofat stressed these adjustments may not be enough to mop up liquidity in the system.

“Given flush overall systemic liquidity, we believe the effective monetary policy rate is the SDA rate, as reflected in overnight interbank rates trading close to the SDA rate,” she said.

SDA rates were slashed by a total of 150 basis points last year and access by trust departments were limited to flush out funds from the facility.

Sofat said Barclays eyes at least a 50-basis point increase in the SDA rate in the next three to six months as high liquidity growth persist.

Standard Chartered economist Jeff Ng, for his part, concurred with Sofat that further adjustments in the reserve requirement ratio, SDA rate, and key policy rates are in the offing.

“We expect BSP to continue to gradually adjust the RRR at its two monetary policy meetings in the second quarter of 2014, raising it by one percentage point at each meeting to 21 percent and keeping it there until year-end,” he said in a research note.

Key policy rates meanwhile, are seen being hiked by 25 basis points in the third quarter, and by another 25 basis points in the last quarter, Ng said.

For the SDA rate, a 25-basis point hike is also forecast in the third quarter, followed by another 25-basis point increase in the fourth quarter.

“Given the gradual pace at which BSP is likely to move, we do not see any negative impact on growth for now,” Ng said.

“Stronger investment and exports are likely to continue to support growth,” the economist added.