American banking giant JP Morgan Chase sees the Bangko Sentral ng Pilipinas raising the rate on its special deposit accounts (SDAs) for the last time by another 25 basis points during the next policy meeting on July 31 before increasing its key overnight borrowing rates in the fourth quarter.
In a research note dated July 3, Singapore-based JP Morgan Chase economist Matt Hildebrandt said last month’s surprising 25-basis point, which followed back-to-back 1-percentage point reserve requirement increases, suggested that the BSP remained focused on fast money growth. However, he said the country’s growth has cooled and money growth would likely slow in the second half as base effects from the last year’s SDA rule changes take effect. At the same time, he noted that the acceleration in inflation had mostly reflected power rate increases and typhoon-related price shocks rather than demand-pull price pressures.
“Thus, one more SDA rate rise is possible given that BSP eased these rates (by) 150 basis points last year, but it will be a close call,” Hildebrandt 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 to the broader market.
The JP Morgan economist said any additional tightening would only likely occur later this year if the inflation-targeting BSP would become more worried about inflation overshooting its target range in 2015. The BSP is targeting a lower inflation rate range of 2-4 percent for 2015, lower than the 3-5 percent range for this year.
During its monetary policy-setting last month, the BSP kept its overnight borrowing or reverse repurchase rate—contrary to most expectations that it would be tightened—at 3.5 percent but raised the SDA rate by 25 basis points to 2.25 percent.
While Philippine inflation has probed the upper half of the 3-5 percent target range of the BSP, which also noted that risks were tilted to the upside, the Hildebrandt cited the BSP’s observation that inflation expectations were within the target band and that price pressures were mostly from the supply side.
“We think that liquidity and financial stability concerns have been the main drivers of BSP’s recent tightening and that one more 25-basis point SDA rate hike is more likely than not at the next meeting on July 31,” he said.
But Hildebrandt noted that growth was likely to undershoot the government’s unofficial 7-8 percent GDP target and money growth was already slowing and set to slow more notably from July.
“For these reasons and because higher SDA rates mean higher sterilization interest rate costs, we expect the BSP to pause after this month’s meeting,” he said.