HSBC sees Bangko Sentral ng Pilipinas keeping interest rates steady

MANILA, Philippines - Bangking giant HSBC Ltd. expects the Bangko Sentral ng Pilipinas (BSP) to keep interest rates unchanged for the rest of the year.

In a report, HSBC economist Trinh Nguyen said the BSP is likely to keep key policy rates steady on Aug. 13 and for the rest of the year.

Nguyen said Philippine monetary authorities are likely to tweak interest rates in the first half of next year.

“It will wait until the first half of 2016 to implement changes to the operational aspect of its monetary policy. Most importantly, there is room for fiscal spending to step up to help growth, as it has been lackluster thus far,” Nguyen said.

Inflation eased to a record low of 0.8 percent in July from 1.2 percent in June due to lower transportation costs and easing food prices. This brought core inflation to 1.9 percent in the first six months of the year, lower compared to the two percent to four percent target set by the BSP.

Nguyen said inflation would trend sideways in the next two months and gradually pick up in November and December due to volatile weather patterns, an unfavorable base effect, and increased spending due to election expenditure ahead of the 2016 presidential race.

However, she said headline inflation would remain low, hugging the bottom of the BSP target.

She added the BSP has the policy space to cut interest rates amid the easing consumer prices.

“If the question is a matter of policy space, then yes, the central bank has low inflation to justify its decision to cut rates. But we argue the room is artificial and the BSP will not be tempted to cut rates. We believe the benefit versus cost argument will not be convincing enough for the central bank to pull the trigger,” Nguyen said.

She added easing inflation over the past few months is not indicative of low domestic demand in the Philippines.

According to Nguyen, weak global demand evidenced by shrinking exports pulled down the country’s gross domestic product (GDP) growth to 5.2 percent in the first quarter of the year.

This prompted HSBC to slash its GDP growth forecast for the Philippines to 5.6 percent instead of six percent this year. This is way below the GDP growth target of seven to eight percent set by the country’s economic managers.

“We believe they have already gradually allowed the currency to absorb some of the shocks from sluggish global demand. In the coming months, their stance will likely be unchanged,” she said.

The economist said the BSP is also keeping a close watch on the impending interest rate hike by the US Federal Reserve within the year.

“What are really keeping it anchored are steady remittance inflows and the service sector. We believe the BSP is cognizant of this fact and will stay vigilant. We believe this is one of the motivations for the central bank to not slash interest rates, potentially spurring potentially domestic capital outflow,” she said.