BSP may hold key rates steady up to the last minute
Due to global headwinds, the central bank is expected to sustain its support for the domestic economy for as long as it can before adjusting policy rates at the last minute to curb inflationary pressures.
In a new report, financial giant Citigroup said the Bangko Sentral ng Pilipinas (BSP) could delay its inevitable hike in interest rates, despite emerging price pressures, to ensure that domestic demand would stay robust.
“Offshore headwinds from US fiscal constraints, China’s uncertain prospects, emerging market macro weakness, etc., skew the risk appraisal in favor of guarding against downside risk to growth,” Citi economist Jun Trinidad said.
The BSP is expected to keep its current stance of monetary policy until the third quarter of the year, Trinidad said.
Last week, the BSP’s Monetary Board (MB) kept its overnight borrowing and lending rates at record lows of 3.5 and 5.5 percent. Interest for special deposit accounts (SDA) was also kept at a record low of 2 percent across all maturities, while banks’ reserve requirements were maintained at 18 percent.
The BSP decided to stick to its current policy settings despite signs that inflation bottomed out last month. From 2.1 percent in August, the average increase in consumer prices accelerated to 2.7 percent in September.
The higher inflation trajectory was reflected in the BSP’s revised forecasts for 2014 and 2015, when inflation is expected to average at 4 percent and 3.4 percent, respectively. These forecasts are higher than the 3-percent inflation expected for 2013.
Trinidad said inflation would not likely head back to less than 3 percent even with the rate of growth of the country’s economy, as measured in terms of gross domestic product.
He added that the easing of global uncertainties in the second half of next year, which would benefit the country’s real economy, could warrant a modest adjustment to 4 percent for the overnight borrowing rate by end-2014.
Policymakers may continue “to express a pro-growth bias despite evident inflation upticks and higher inflation trajectory,” Trinidad said. “[The Monetary Board’s] preference to keep its accommodative stance in response to challenging global economic conditions best reflected this growth preference.”
