After last week’s quarter-percentage increase in its special deposit accounts (SDAs), Ayala-led Bank of the Philippine Islands sees the Bangko Sentral ng Pilipinas further tightening monetary settings using the SDA facility through 2015.
Last week, the BSP kept its key policy rates at 3.5 percent for the overnight borrowing facility and 5.5 percent for the overnight lending facility contrary to most expectations that the monetary agency would start raising these rates. The reserve requirement ratios were left unchanged as well. However, the BSP raised the interest rate on the SDA facility by 25 basis points to 2.25 percent across all maturities.
“The hike was a commendable move as it sends a clear signal that BSP’s (profit and loss/interest expense) cost concern—which naturally results from higher policy rates—takes a lower rank in the hierarchy of BSP’s policy priorities,” BSP lead economist Emilio Neri Jr. said in a research note.
He said that this also demonstrated that the below-consensus gross domestic product (GDP) growth for the first quarter was “not going to get in the way of carrying out their price stability mandate.”
More adjustments
Neri said this decision would likely be followed by similar “mild” adjustments through end-2015 and was not expected to have a worrisome impact on GDP growth.
BPI, one of the few institutions that had expected the SDA increase during last week’s BSP meeting, sees another 75 basis points cumulative increase in the SDA rate through end-2015. These increases, Neri said, would be “far from the abrupt and destabilizing variety that emanate from sizable tightening moves seen elsewhere in the emerging markets.”
“We continue to expect Philippine GDP growth to be among the fastest in the Asia region at 6.2 percent in 2014 and at 6.5 percent in 2015 amid this tightening environment,” Neri said.
The SDA is a potent monetary tool created by the BSP to mop up excess liquidity in the system, offering higher-yielding deposit instruments at the central bank that can cascade even to retail investors.
On market implications, Neri said the BSP’s decision to increase the SDA rates could temper some of the pressure on the peso-dollar exchange rate, which had been compounded by higher global oil prices emanating from geopolitical risks and better-than-expected growth and inflation figures from the US economy.
“We expect the yield curve to steepen in the near term as the long end of the curve starts to price in rising inflation and the forthcoming BSP rate hikes,” Neri said.
Steep yield curve
A steeper yield curve means that the spread between the yield on long-term and short-term bonds has increased. This happens when the market expects inflation and economic growth to pick up, as improving growth typically boosts demand for long-term money.
Neri said yields at the short end of the curve could be firmer as expectations of additional SDA rate increases could provide support for the peso appreciating against the dollar.
On the stock market, Neri said the decision could weigh on local equities and provide more room for correction as property shares and other interest-rate sensitive sectors could see a pullback.
Meanwhile, he said the BSP’s upward revision of Philippine inflation forecasts could weigh on consumer as well as to consumer-related stocks like retail trade.
During last week’s monetary setting, the BSP also raised its forecast for average 2014 inflation to 4.4 percent from 4.3 percent and to 3.7 percent from 3.4 percent in 2015.
For global Philippine sovereign cash bonds or ROPs, Neri said prices could also come under pressure as Philippine debt dynamics might see a slight deterioration as slowing growth combined with the BSP’s tightening moves could lead rating agencies to delay any immediate decisions to raise sovereign ratings.
“More aggressive big-ticket infrastructure spending could, however, mitigate this in the medium term even if the domestic financial conditions tighten slightly vis-a-vis the highly accommodative market conditions in the recent past,” he said.