BSP seen to keep key policy rates unchanged

A NEUTRAL stance at this week’s central bank policy meeting is all but cast in stone, analysts said. The direction of monetary policy settings, which affect the cost of money in the country, is less so.

Financial institutions polled by the Inquirer this month were divided on what the BSP would do next as far as policy settings were concerned. The 10 banks polled were unanimous that rates would be kept steady during the BSP’s first policy meeting for the year this Thursday.

On one side, several banks said monetary easing through interest rate cuts or adjustments of other measures might happen as stable prices give the BSP space to provide an additional boost to economic growth.
The BSP may also opt to move in tandem with other Asian central banks to keep movements in the peso’s value roughly in line with other currencies in the region.

Banks on the other side argue that the BSP would take its cue from the US Federal Reserve, which is expected to raise interest rates by the middle of the year.

A Fed hike comes after the October decision to halt the central bank’s quantitative easing program, which at its height was pumping $85 billion in fresh cash into world markets.

“This is not cast in stone,” said Joey Cuyegkeng, economist at Dutch financial giant ING’s Manila branch.
ING and JP Morgan see the BSP taking a more accommodative stance as inflation declines.

“If the peso remains an out-performer and that policy settings are seen to remain steady in contrast to easing of other Asian central banks, then the BSP may have a reason to ease policy settings to maintain a steadier relationship with other Asian currencies,” Cuyegkeng said in a recent note to clients.

He said low inflation gives the BSP space to be more accommodative of economic growth.
In January, inflation slowed to a year-and-a-half low of 2.4 percent from December’s 2.7 percent. For 2015, the BSP is targeting an average of 2 to 4 percent.

The BSP’s main goal is keeping prices stable to protect consumers’ purchasing power. Higher interest rates curb consumer demand, which keeps prices stable but puts a drag on economic activity. Lower rates stimulate spending but may lead to excess demand that drives prices up.