BSP likely to keep interest rates at record lows

The Bangko Sentral ng Pilipinas is likely to keep its key interest rates at record-low levels until end-2014, when the inflation-targeting central bank may hike the overnight borrowing rate by a modest 50 basis points to 4 percent.

In a commentary issued last week after the BSP’s decision to keep its monetary settings unchanged, Citibank economist for the Philippines Jun Trinidad said policymakers were widely expected to stay the course since the inflation path over the next 12 months remained firmly within the BSP’s annual inflation target range of 3-5 percent.

The BSP’s overnight borrowing rate has been kept at 3.5 percent since October 2012.

Citibank continues to hold the view that existing “accommodative” rate monetary settings may have to be adjusted later in the second half of 2014. Trinidad said this would be as the 12-month inflation cycle hits a high of roughly 4 percent in the third quarter of next year on the back of a stronger cost-push environment triggered by robust domestic demand condition, likelihood of persistent positive output gaps amid strong liquidity.

The research note pointed out that the BSP’s base-case inflation forecast would yield an average inflation of 4 percent in 2014 from 3 percent in 2013 before easing to an average of 3.4 percent in 2015.

“With average inflation unlikely to head back to less than 3 percent amid upside GDP (gross domestic product) potential and easing global uncertainties in second half of 2014, the timing may be appropriate for modest rate adjustments of the policy rate to 4 percent by end-2014,” Trinidad said.

For the meantime, however, Trinidad said the pro-growth bias of monetary authorities would likely prevail despite the evident uptick in inflation.

He said the preference of the BSP’s policymaking Monetary Board (MB) to keep such accommodative stance was in response to challenging global economic conditions.

“Offshore headwinds from US fiscal constraints, China’s uncertain prospects, EM (emerging market) macro weakness, etc. skew the risk appraisal in favor of guarding against downside risk to growth despite the MB claiming robust domestic prospects supported by buoyant domestic demand and favorable consumer and business sentiment,” Trinidad said.