Bangko Sentral seen keeping key rates steady

MANILA, Philippines—The Bangko Sentral ng Pilipinas is seen keeping key interest rates steady during Thursday’s policy rate setting as the country’s August inflation rate remained subdued despite some monsoon shocks, American banking giant Citigroup said.

But Citi also sees the 2.1-percent inflation rate for August nearing the bottom of the cycle, suggesting that the BSP may turn hawkish by yearend, at the earliest. Citi expects the BSP raising the special deposit account (SDA) rate by December while keeping the overnight rates steady, the first sign of monetary tightening that may continue through 2014.

For now, Citi said the disinflation was still intact despite months of a weak peso, thus supporting the accommodative bias during this week’s meeting.

The research noted that the BSP’s business sentiment survey had flagged higher inflation expectations in the fourth quarter of slightly in excess of 3 percent. “However, this remains well within the lower half of the BSP’s annual inflation target range of 3-5 percent and as such, we believe it’s not significant enough to unhinge the existing policy rate,” it noted.

Neither are policymakers seen to react to elevated one-off food prices in late August arising from distribution bottlenecks caused by heavy monsoon rains in the flooded areas. The Citi research noted that the latest increase in retail gasoline and diesel prices exceeding P1 a liter on average that would probably get reflected in the September inflation rate figure.

In a separate Citi research analyzing the August inflation numbers, it pointed out that with the US and Japan’s economic prospects firming up, the eurozone recession at an end and China’s manufacturing indicators surprising on the upside, global uncertainties might be eroding, which could result in stronger demand for oil.

“These do not imply a return to 2007-08 oil price upswings, but we rule out a sustained softer oil price outlook,” the research said.

Citing the bank’s updated monthly extrapolation, Citi said the country’s inflation rate could rise to 2.7-2.8 percent year on year by December which, while benign, would be on an upswing.

“While not as robust as in the first quarter, the macro backdrop remains strong and is likely to nurture a faster cost-push pass-through environment certain to erode the economy’s sweet spot,” the research said. “While expected CPI (consumer price index) upticks in the fourth quarter 2013 are still benign amid a collapse in SDA balances, we sense conditions may be appropriate for an SDA rate hike in December while the overnight rate would be held steady. We sense this may be BSP’s first signal of tightening rates en route to policy rate adjustments in 2014.”