BSP not likely to tighten key policy rates for now

The Bangko Sentral ng Pilipinas (BSP) is widely expected to take a breather from its monetary tightening stance this month due to the slowdown in the country’s inflation.

Economists from JP Morgan Chase, Citigroup, BofA-Merrill Lynch, HSBC and Bank of the Philippine Islands said in separate research notes that the BSP would shift to neutral gear when it decides on the country’s monetary policy on Oct. 23.

This was after inflation eased to 4.4 percent year-on-year in September, after peaking at 4.9 percent in the preceding months. Inflation in September was below the projected rate of 4.5 percent.

The economists also said that the BSP’s relaxed stance toward monetary policy could extend until the end of the year.

“Back in the sweet spot of low inflation and upbeat GDP (gross domestic product) backdrop, we expect policymakers [to] maintain existing policy settings,” Citi economist Jun Trinidad said.

Economist Sin Beng Ong of JP Morgan Chase said that with food inflation easing in September and global commodity prices having slowed down recently, the BSP would likely hike its policy rates once—by 25 basis points—by the middle of next year. Ong revoked his earlier call that interest rates would rise in the fourth quarter of 2014.

Emilio Neri Jr., Nicholas Antonio Mapa and Robbin Ivory Brillantes of Bank of the Philippine Islands wrote in a research note that the softer-than-expected inflation print in September could prompt the BSP to shift to a neutral stance, in contrast to its aggressive policy move last Sept. 11, when it raised both the overnight policy and special deposit account rates (SDA) by 25 basis points.

At most, the BPI team believes that the BSP may only adjust the overnight rate and keep the SDA rate steady, particularly if the peso-dollar exchange rate were to remain in the vicinity of 45:$1.

Jojo Gonzales of BofA Merrill Lynch said the break in the acceleration in food prices should deter monetary authorities from further tightening the key policy this year.

Trinh Nguyen of HSBC said the sharp deceleration of the consumer price index in September was a welcome respite, driven by a favorable base effect and subdued food and transportation costs. HSBC sees inflation staying at the same level in October and slowing sharply in November and December.

“The central bank is expected to pause at the upcoming October meeting to monitor price, growth and external conditions. The BSP’s inflation target, however, will narrow in 2015 to 2-4 percent (from 3-5 percent),” Nguyen said. “While headline inflation will likely stay on track in January and February, we expect it to spike from March 2015, prompting interest rate hikes.”