BSP expected to hike rates

MANILA, Philippines - Foreign financial institutions expect the Bangko Sentral ng Pilipinas (BSP) to hike interest rates in its next policy meeting to keep a lid on inflation.

The central bank earlier forecast inflation to rise to a five-year high of 5.5 percent in August on the back of rising food prices and upward adjustments in power rates.

In a research note, JPMorgan Chase & Co. chief Asean economist Sin Beng Ong said they are anticipating a 25-basis point (bps) increase in overnight reverse repo rate (RRP) during the Sept. 11 meeting of the Monetary Board, the policy-making body of the BSP, prior to a forecast hike in policy rates in the first quarter of 2015.

He said inflation expectations are more likely conditioned by food prices than other costs given that food is heavily consumed daily by the average Filipino.

“Indeed, if food prices rise further, which is the extant risk given supply issues, then this could affect inflation setting behavior more broadly and the BSP would be keen to anchor these expectations,” Sin said, adding that a policy hike will occur in the first quarter of 2015.

Trinh Nguyen, an economist at Hongkong and Shanghai Banking Corp. (HSBC), likewise said they placing their bet on a similar hike in policy and special deposit account (SDA) rates.

“We expect the central bank to hike the SDA and policy rate by 25 bps at the Sept. 11 meeting, taking rates to four percent and 2.5 percent, respectively, by the end of the third quarter of 2014,” Trinh said.

The HSBC economist lauded the 6.4-percent growth rate of the Philippine economy in the second quarter, coupled with higher- than-expected net export growth, but warned the picture is not as rosy as it appears given slowing domestic demand.

“The pick-up in net exports was primarily driven by a sharp slowdown of imports, caused partly by port congestions in the second quarter and a favorable base effect for exports. With these factors abating in second semester, net export growth will be reduced. The strong second quarter growth number, however, gives space for the BSP to temper inflationary pressures,” she said.

“At risk of pouring a bucket of ice water over the rosy Q2 growth print, we believe the acceleration was a one-off.”

Australia and New Zealand Banking Group Ltd. (ANZ) economist for Asean and Pacific Eugenia Victorino added the BSP could raise the rates on SDA and the RRPs next month.

“We believe that the window to keep the SDA rate low at 2.25 percent has closed, while outstanding RRPs have remained broadly unchanged,” Victorino said.

Inflation already rose to a 33-month high of 4.9 percent in July, driven by soaring food prices and hikes in utility rates and transportation fares.

This brought the seven-month average to 4.3 percent, above the midpoint of the central bank’s three- to five-percent target for this year.

Last month, monetary authorities already raised key policy rates to safeguard inflation targets for this year and next. At the same time, the BSP also hiked the banks’ reserve requirements and the SDA rate to rein in the strong liquidity growth.