Monetary authorities are expected to keep interest rates at record lows until the middle of next year.
Financial giant Australia and New Zealand Banking Group Ltd. (ANZ) said that, despite the country’s healthy growth, inflation remains modest, giving the Bangko Sentral ng Pilipinas (BSP) scope to hold policy rates and keep borrowing costs down.
“We maintain our call for the BSP to hold its policy overnight borrowing rate at 3.50 percent through the first half of 2014,” ANZ said in a research note this week. “With 12-month average inflation at 3.1 percent year-on-year as of July, the scope to hike rates has declined.”
The BSP’s overnight borrowing and lending rates currently stand at record lows of 3.5 and 5.5 percent.
Yields for special deposit accounts (SDA) are also at a record low of 2 percent across all maturities.
The BSP’s next policy stance meeting will be on Thursday next week.
Low policy rates help encourage economic activity by influencing banks to lower the cost of funds for businesses and consumers. Conversely, higher policy rates restrict economic activity, which keeps consumer prices from rising to the point of choking the economy.
According to ANZ, the BSP may hike rates by the second half, starting with a 25 basis-point increase in overnight borrowing and lending rates. The BSP recently noted a surge in the growth of domestic liquidity or M3.
M3 growth reached 20.3 percent in June—the fastest rate in six years.
ANZ said that, with domestic liquidity “swelling,” the rate of price increases may start to accelerate by next year.
The government is scheduled to release inflation data for August this week.
Last week, the BSP said inflation likely settled between 1.9 percent and 2.7 percent for the month as lower power prices offset the effects of the higher cost of fuel due to a weaker peso.