BSP expected to raise key interest rate in 2014

The period of historic low yields and borrowings costs may be at an end as the Bangko Sentral ng Pilipinas (BSP) is expected to finally raise its key policy rate this year.

First Metro Investments Corp. (FMIC) and University of Asia and the Pacific (UA&P), which run a joint research initiative, project that the BSP will hike its overnight borrowing rate in the second half of 2014.

In a briefing Monday, FMIC president Roberto Juanchito Dispo said the central bank would raise its overnight borrowing rate either by 25 or 50 basis points in the second semester as a response to accelerating inflation.

Because of the increase in the BSP’s overnight borrowing rate, Philippine banks may raise their own lending rates, potentially tempering growth in loans.

The slowdown in the expansion of credit may ease growth in demand for goods and services and, in turn, slow down the rate of rise in consumer prices.

During the same briefing, UA&P economist Victor Abola said inflation could accelerate to an average of 4 percent this year.

Official inflation figure for 2013 will be released by the National Statistics Office Tuesday. But based on estimates by the central bank, inflation likely averaged at 2.9 percent last year.

Abola said inflation would accelerate this year due to a host of factors, including the peso’s depreciation, the improvement of the global economy, sustained growth of household consumption, and post-calamity reconstruction spending.

But even if inflation were to average 4 percent, it would still be within the government’s official target range of 3 to 5 percent.

“Domestic demand is seen to remain intact and will be boosted by a likely depreciation of the peso,” Abola said.

Inflation throughout 2013 hovered mostly below 3 percent—which is at the low end of the government’s official target—on account of favorable supply aided by higher manufacturing output.

Anemic global demand, caused by lingering economic problems in industrialized countries, also caused inflation to stay modest last year.

But this year, adjustments in factors affecting domestic prices are expected to speed up inflation.

For instance, if the peso were to depreciate further, the cost of imports and overall domestic prices would rise.

The peso hovered at around 42.45:$1 in 2013. This year, it is expected to average between 43 and 46 against the US dollar, based on estimates by FMIC and UA&P.

Another factor that is seen to boost inflation is spending on post-calamity reconstruction activities.

The government’s reconstruction plan for areas affected by Supertyphoon “Yolanda” is valued at P360.8 billion, of which at least P100 billion will be spent this year.

Improving global economic conditions, led by the recovery of advanced economies, may also boost demand for goods and services.

The US economy, for instance, is projected to grow by 2.6 percent this year from an estimated 1.6 percent in 2013.

The euro zone may also expand by 1 percent this year, after it suffered a contraction estimated at 0.4 percent in 2013.  Michelle V. Remo