Monetary authorities are expected to tighten policy settings after a year and a half of being accommodative—possibly this Thursday—following the US Federal Reserve’s clearer “tapering” signals last week.
The only question left to answer is what form the first step toward tighter monetary conditions will take, analysts said.
“It’s hard to predict,” Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. said in an interview. “The likelihood that they will start with an increase in policy rates has increased,” he told the Inquirer.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. last Thursday said “early measured adjustments” in monetary policy settings would be ideal, even though inflation forecasts still showed consumer price movements staying within the official target range for the year.
His comments followed the US Federal Reserve’s decision to cut its bond-buying program by another $10 billion a month for the third straight policy meeting.
US Fed Chair Janet Yellen, speaking to reporters after the cut was announced, said benchmark interest rates in the US would be raised six months after the monthly bond-buying program comes to an end.
Neri said apart from a hike in the BSP’s own benchmark rates, the Monetary Board may also opt to adjust yields for special deposit accounts (SDA). Neri cited the improving financial position of the BSP, which gives it the resources to offer higher returns for banks parking funds with the BSP.
The BSP’s benchmark overnight borrowing and lending rates currently stand at record lows of 3.5 and 5.5 percent, respectively. Rates for SDAs also stand at 2 percent across all maturities.
In a separate note to clients, Citi economist for the Philippines Jun Trinidad said an SDA rate hike of about 25 basis points would be more likely this Thursday.
“We sense policy makers’ bias would be directed at prioritizing the SDA rate in their initial tightening move while leaving the overnight rate unchanged,” Trinidad said.
“The key driver would be excess liquidity,” he said, noting that growth in the country’s money supply or M3 has stayed above 30 percent in the last seven months, threatening to fuel inflationary pressures.
He said one-off developments, such as the upcoming maturity of over P100 billion in peso-denominated government treasuries in January and the weakening currency, which makes remittances from abroad more valuable in peso terms, could keep M3 growth at high levels.
“Excess liquidity can aggravate the inflation trajectory,” Trinidad said. The BSP expects inflation to average at around 4.2 percent this year, higher than 2013’s 3 percent. The forecast for the year is near the top end of the BSP’s target range of 3 to 5 percent.