BSP seen keeping key rates steady on growth optimism

The Bangko Sentral ng Pilipinas (BSP) is expected to keep interest rates steady this week, preserving its ammunition as it remains wary of risks that may destabilize prices in the coming months.

Monetary officials are also expected to ignore the perceived need to boost growth with rate cuts, and instead rely on the national government’s fiscal authorities to boost spending.

“BSP expects growth to improve on more fiscal spending and is mindful of risks to inflation from El Niño-related food inflation and potential Brent (oil) price increases,” British bank Standard Chartered said in a note written by economists Jeff Ng, Divya Devesh and Arup Ghosh.

In a separate research note dated June 23, HSBC economist for Southeast Asia Trinh Nguyen said the easing of the Philippine inflation rate to 1.6 percent year-on-year in May—which was below the BSP’s 2-4 percent inflation target—had given the central bank policy space.

“But the BSP will unlikely lower policy rates as liquidity remains flush and inflation may strike back in the fourth quarter; plus, there is plenty of room for further fiscal spending,” Nguyen said.

Nguyen said many emerging nations of late appeared to be plagued by the same trend: slowing growth and easing inflation, driving central banks to be “trigger happy” and do what they can to ease monetary conditions and prop up ailing demand.

The economist said that at first glance, the Philippines appeared to be stuck with a similar fate, with growth slowing in the first quarter to 5.2 percent year-on-year from 6.5 percent in the previous quarter, underperforming expectations.

Singapore’s DBS in a separate note said the BSP may be content with an economic growth rate that falls short of the government’s target for the year.

“The government’s 7-percent growth target was always a long stretch to begin with,” DBS economist Gundy Cahyadi said.

Bank of the Philippine Islands lead economist Emilio Neri Jr., for his part, said the threat posed by the El Niño phenomenon on the country’s food supply would weigh on the BSP’s decision.

He said the BSP should be aware that the low inflation and growth slowdown in the first quarter were “transitory” in nature.

“Inflation is, in fact, at the risk of reversing by the second half due to El Niño and the recovery of global oil prices,” he said.

Neri said another risk the BSP may have its eye on was the eventual adjustment in policy settings by the US Federal Reserve, which would have effects on global financial markets.

The BSP has said it expects the US Fed to hike rates by September or December of this year, depending on how well the American economy can sustain its recovery.

This would be the first rate hike by the world’s largest central bank, which prints the world’s most used currency, since the 2008 global financial crisis.

“Monetary authorities are cognizant of the risks of easing monetary policy at a time when the US FOMC is poised to normalize monetary policy through 2016,” Neri said.

For its part, Stanchart said an unchanged BSP policy rate at its meeting today would be largely in line with foreign exchange market expectations.

“We think the US dollar-Philippine peso trajectory will be dictated by broad US dollar moves and external developments affecting risk appetite. Recent domestic economic data have surprised to the downside. And, El Niño concerns have weighed on market sentiment, resulting in persistent portfolio outflows from domestic equity markets,” Stanchart said, explaining the peso’s underperformance relative to most Asian emerging market peers in the month of June.