PH central bank ‘in a sweet spot,’ says HSBC

The Bangko Sentral ng Pilipinas may avoid any monetary tightening until the second half of 2014, as the inflation environment remains manageable for the next six months, British banking giant HSBC said.

“The central bank is in a sweet spot,” HSBC economist Trinh Nguyen said in a research issued late Thursday after the BSP’s policy-making Monetary Board kept key interest rates at record low levels.

The BSP’s overnight borrowing rate was kept at 3.5 percent, overnight lending rate at 5.5 percent and the special deposit account (SDA) rate at 2 percent.

During Thursday’s meeting, the BSP’s inflation forecast for 2013 was kept at 3 percent but slightly raised to 4 percent from 3.9 percent for 2014.

The forecast for 2015 was trimmed to 3.4 percent from 3.5 percent.

“Growth momentum is looking up, especially from a demand perspective; inflation, despite stormy weather and strong growth, remains very manageable in the next six months; furthermore the BSP’s operational costs have declined significantly,” she said.

With the current monetary stance “appropriate,” Nguyen said the BSP was not likely to shift gears until the second half of next year, when tightening is likely.

“Inflation picked up more than expected in September due to higher food and energy prices but it is still benign and below the central bank’s 3-5 percent target,” Nguyen said.

Even though headline inflation should pick up gradually toward year-end and into 2014, we do not expect it to breach the mid-point of the target range until the second half of 2014, Nguyen said.

“We do not expect policy to change until second half of 2014, as inflation is expected to stay benign until then and growth momentum is still robust. Better economic conditions in host countries have boosted remittances lately: these transfers rose more than expected in August, bolstering private consumption in the country,” she said.

After a lackluster performance in the first half of this year, Nguyen said exports had also risen sharply thanks to non-electronics’ stellar performance. She expects this trend to continue toward year-end, with both trade and remittances performing better than in the first half of 2013.

Furthermore, she noted that the BSP’s operational costs had declined significantly, with the central bank incurring only P14.4 billion in losses the first eight months of the year versus P57.8 billion in the same period last year.

Foreign exchange fluctuations have resulted in P2.6 billion of gains for the BSP from January to August, in contrast to a P30.5 billion loss last year, she noted.

“This means that the central bank can comfortably maintain its policy position. The work for the central bank is largely done, as liquidity, growth, and inflation trends are more than satisfactory,” she said.