The Bangko Sentral ng Pilipinas has hinted the key policy rates would be kept at historic low levels when its Monetary Board holds next week the last policy setting meeting for the year.
BSP Governor Amando Tetangco Jr. said the current levels for the central bank’s overnight borrowing and lending rates were deemed appropriate given the favorable combination of high economic growth and slow inflation.
“At this point in time, the stance of monetary policy is appropriate,” Tetangco told reporters Wednesday at the sidelines of a financial forum jointly organized by Citi and Financial Times.
“There has been an ideal convergence of high growth rate and benign inflation,” added Tetangco, noting the likelihood that the “high growth-slow inflation” scenario could be sustainable over the medium term.
He cited latest estimates by the BSP that inflation for this year, 2013 and 2014 would settle at about 3 percent. The official inflation target range is 3 to 5 percent.
The government reported last week that the economy, measured in terms of the gross domestic product, grew by a surprising 7.1 percent in the third quarter. This brought the average growth for the first nine months of 2012 to 6.5 percent.
Officials said the better-than-expected performance indicated the likelihood that the full-year growth rate could be faster than the official target of 5 to 6 percent. The government also reported Wednesday that inflation settled at only 2.8 percent in November, bringing the average for the first 11 months to 3.2 percent.
With the favorable levels of economic growth and inflation, Tetangco said there was no need to tweak the current policy rates of the BSP. He said, however, that the central bank would not hesitate to adjust its policy rates in the event of developments that could threaten economic and price stability.
The central bank’s key policy rates, which affect commercial interest rates, stand at record lows of 3.5 and 5.5 percent for overnight borrowing and lending, respectively. These had been brought down to historic lows following four rate cuts of 25 basis points each in January, March, July and October.
Private economists have mixed views on whether interest rates should go down further.
The BSP would likely hold rates steady during its next policy rate-setting on Thursday next week, said Trinh Nguyen, an economist at British banking giant HSBC. On the other hand, Bank of the Philippine Islands economist Emilio Neri Jr. said the BSP should cut its overnight borrowing rate by another 25 basis points to be consistent with its mandate to maintain both price and financial stability.
“Together with additional macro-prudential measures, another 25-basis-point cut on December 13 could help temper a peso appreciation to bring the market back above the 41 handle before the year closes,” Neri said.
Swiss global financial group UBS sees the BSP turning modestly hawkish in monetary policy, bringing its overnight borrowing rate 50 basis points higher at 4 percent at the end of next year as inflation pressures emerge while risks to global growth wane.
The November inflation rate of 2.8 percent was below the market consensus forecast of 3-3.1 percent. While monetary authorities started hinting that they were no longer going to cut policy rates during the Dec. 13 meeting, Neri said the latest data might lead them to reconsider.
“Monetary authorities must remember that the 7.1-percent headline GDP [gross domestic product] print only looked impressive because of the disappointing performance we had in 2011. Consider the fact that we grew by merely 3.2 percent in third quarter 2011, which brings our two-year average growth to around 5 percent, a full percentage point weaker than Indonesia, which has consistently expanded by more than 6 percent since 2010,” Neri said.
Macro-prudential measures like restricting the higher-yielding special deposit account (SDA) facility limited to local investors have had some effect on the foreign exchange market, Neri said, but he opined that these were “clearly not doing enough to temper the peso’s rapid rise.”
HSBC’s Nguyen said upside risks to inflation—including strong domestic demand, weather events and an unfavorable base effect—would likely motivate the BSP to hold rates steady next Thursday.