BSP expected to raise key rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas is expected to finally increase key rates when it revisits policy settings next month, analysts said in separate research notes.

Rahul Bajoria, economist at Barclays, said the rising inflation rate is expected to prompt the BSP to raise key policy rates, which have been kept steady since October 2012.

“We think the next move from BSP is likely to be an increase in the policy rate… BSP raised its 2014 and 2015 inflation forecasts to 4.3 percent and 3.4 percent, respectively. This is in line with our view, but with our inflation forecasts at the top end of itscorridor in both years, we see BSP raising its policy rate in the next meeting on June 19, by 25bp (basis points),” Bajoria said in a research note.

By the end of this year, Barclays expects a total of a 50-basis-point increase in key policy rates, Bajoria said.

Overnight borrowing and overnight lending rates have been maintained at 3.5 percent and 5.5 percent, respectively, during Thursday’s meeting. The BSP cited inflation expectations remaining within the three percent to five percent target for this year and the two  percent to four percent target range for 2015 for keeping the rates steady.

Concurring with Bajoria, Trinh Nguyen, economist at The Hong Kong and Shanghai Banking Corp. Ltd., expect the BSP to start adjusting rates next month.

Nguyen, in a report, stressed headline inflation is seen accelerating further this quarter due to higher food prices.

“The effects of Typhoon Haiyan are lingering, impacting the supply of rice and sugar. Coupled with this, weather experts estimate that the Philippines will likely receive below-average rainfall in Q4 (fourth quarter) 2014 and Q1 (first quarter) 2015 and have a more volatile tropical cyclone pattern and track,” Nguyen said.

Moreover, the Supreme Court has extended indefinitely the stay order on Manila Electric Co.’s power rate hike, further adding to inflationary pressures.

“We expect main policy rates to rise, albeit gradually, beginning with a 25bp hike at the next meeting and another hike in Q3 (third quarter) 2014 to take rates to four percent by end 2014,” Nguyen said.

But Gundy Cahyadi, economist at DBS Bank Ltd., said he still sees the BSP increasing key policy rates by a total of 50 basis points in the second half.

Cahyadi stressed the country’s economic growth is expected to remain strong, as driven by domestic consumption and investment growth.

“Inflation is trending higher, although as previously noted, it is not at an alarming pace as yet. Meanwhile, external liquidity position remains strong, especially with sustained flows from overseas foreign workers’ remittances,” Cahyadi said.