BSP seen under pressure to hike rates

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The Bangko Sentral ng Pilipinas (BSP) may be preparing the market for a hike in interest rates to combat price pressures that have started to crop up, as suggested by its “hawkish” tone following its policy stance meeting last week.

Financial giant Citi over the weekend likewise warned that the Philippine economy could exit the so-called “sweet spot” anytime soon, after it greatly benefited from high growth rates and low inflation.

With rising tensions in the Middle East, along with the expected “tapering” of the US Federal Reserve, policymakers in emerging countries like the Philippines may be compelled to hike interest rates.

“The key implication behind the Monetary Board’s (MB) hawkish citation is that oil price pressures remain at the core of upside inflation risk for a net oil importing country with upbeat growth prospects,” Citi said in a research note.

After the MB’s policy meeting last week, when key overnight lending and borrowing rates were kept at their respective record lows of 3.5 and 5.5 percent, BSP Amando M. Tetangco Jr. said the inflation outlook had shifted “slightly toward the upside as oil prices have become more volatile amid ongoing geopolitical tensions in the Middle East.”

Inflation averaged at 2.8 percent at the end of August, slightly lower than the BSP’s full-year target of 3 to 5 percent.

“While the MB’s tone doesn’t signal alarming inflation risk, it may be the start of gradual erosion of the economy’s ‘sweet spot’ of strong growth amid low inflation,” the American giant added.

It said the erosion in its early phase may not necessarily prompt the BSP to respond aggressively.

Over time, however, once the US Fed starts to taper its monthly asset purchase program, Citi said, the BSP may have no choice but to start tightening its monetary policy.

Citi said the BSP’s first move may be a 25-basis-point hike in yields for Special Deposit Accounts (SDA), which currently stand at 2 percent across all maturities.

A hike in SDA rates will prompt most banks to park their funds with the BSP, given the higher yields. As a result, excess cash will be siphoned off from financial circulation and temper demand that may push consumer prices up.

Another risk the BSP faces, Citi said, would be a self-inflicted one. Recent restrictions that ban individual investments from being parked in SDA funds will continue to fuel double-digit growth in the country’s money supply, also known as M3.

The BSP earlier ordered banks to pull out 30 percent of non-pooled SDA funds last July. Because of this development, M3 grew by over 30.1 percent at the end of July—the fastest growth in nearly a decade.

The remaining 70 percent of non-pooled funds would have to be pulled out of SDAs by November.

“Caveat, in our view, would come from exiting SDA monies, beefing up deposits that would revive strong bank lending. Not all of bank lending would fund investments that could render faster consumer-driven growth susceptible to upside inflation risk,” Citi explained.

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  • eight_log

    It is when BSP starts to tinker with things that the economy becomes even more volatile!!!! They allow themselves to become pawns of foreign investors … they are given awards as incentives … lol!!!!

    The Philippine monetary policy makers must stand on their feet and isolate the local econmy from external forces … after all, they have the OFW remittances as a shield.

  • TruthHurts

    The BSP, along with NEDA must adopt monetary policies that would support these goals:

    (1) An active role for the government in the development of the economy;

    (2) import substitution for industries that would compete with imports – the most important being textiles, food, processing machines, energy generators, farming implements (import substitution refers to replacing foreign imports with domestic production);

    (3) adoption of Western technology to increase production of sophisticated products;

    (4) export development of native crafts and other indigenous products along with increasingly value-added products;

    (5) and most importantly, avoidance of relying on foreign loans. I will stress this again, AVOIDANCE. All financing must be borne locally.

    The fifth goal requires that LOCAL INTERESTS must always be low and accessible to all with very few preconditions, and if possible, with no collateral requirements which are inaccessible for most citizens.

    Money lying dormant in the bank, even with high interest, is useless money. Money is only significant to the economy when it is swimming properly across the population. Its movement dictates the flow of one’s economy. The more rules we place on its movement, the more sluggish the overall economy will become.

    To deter inflation, a Price Watch commission must be established to oversee the sharp rate spikes and whether such rising is fair, and if found to be fair, the government ought to intervene to make it affordable again by subsidizing its production.

    • Eddwardd

      dre, the bsp is doing more than what you think… and, what you recommended and enumerated above are by-product of your ignorance about the institution…sencia dre, kung sa tao iyan ang tawag sau may gatas ka pa sa labi…A person can easily be recognized if u’r a neophyte or not, if u have knowledge about the issue or the institution itself.

      Remember, the BSP governor who spearheaded d institution, out of excellent effort to withstand the external problems of the global banking system, was recently declared outstanding central banker…for the past year, he was also declared outstanding central banker. and if u want to know y just do ur research and find out how and why he was named as outstanding central banker…

      • TruthHurts

        Awards do not amount to anything. Not in these times.

        Economists and serious bankers never invoke such nonsense.

        That’s what I call as logical fallacy under Argument from Authority or Appeal to Awards.

        You are unfortunately a victim of that ignorance. Irregardless of the number of awards, we respect results. Even Nobel Laureates can be wrong.

        And you may ask people if they care at all with your beloved BSP governor’s awards. He may decorate his entire wall with it, but for as long as the country is suffering, he will die and be remembered as inutile.

        ******
        And as a footnote:
        Sooner or later, the people would find out about the treasonous deals he has allowed the country to be in. He should never think he could get away with those. No secrets will be left unturned. Many have already proven that. And if he could read this, he ought to be warned. Because we have our means of knowing.

    • http://www.personalfinanceapprentice.com/ Carlos PFA

      Let us set aside for a moment the argument for an activist (and obviously left-leaning) government.

      What you are suggesting is basically relying on our government to recognize, protect, and advance the people’s best interests. There’s nothing wrong with that, obviously. But who can say that our government can be trusted with such a task?

      The pathetic job they’ve done so far is proof they’re not to be relied upon. And though we’re talking about the BSP and not elected plunderers and appointed corruption-practitioners, it’s practically splitting hairs since the monetary board is appointed by the president anyway – and by law one them has to be a cabinet member to boot!

      While I subscribe to the government protecting the interest of local businesses to a certain degree, it is much practical if the path to progress is placed on the shoulders of entrepreneurs.

      Make it easy for locals to setup businesses, and reduce the cost of starting and operating small businesses. Make health and life insurance more affordable.

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