BSP expected to keep interest rates on hold

INTEREST rates will likely stay on hold at next week’s Monetary Board meeting as officials stay wary of allowing further shocks to the peso’s value that may weaken the government’s current fiscal position.

A rate cut by the Bangko Sentral ng Pilipinas (BSP) next week, which would come ahead of an expected hike by the US Federal Reserve in December, may erode the peso’s value, Standard Chartered said in a note Tuesday.

This weakness may lead to higher debt servicing costs for the government, which still holds a significant stock of dollar-denominated obligations.

“The overall leverage condition favors the stable monetary policy stance,” Standard Chartered economist Jeff Ng said.

Next Thursday, BSP’s policymaking Monetary Board meets to determine the stance of monetary settings.

The BSP’s benchmark overnight borrowing and lending rates have stayed at 4 and 6 percent, respectively, since October of last year.

Earlier this week, BSP Governor Amando M. Tetangco Jr. said monetary authorities see inflation picking up in 2016 and 2017 from record levels set this year.

In September, inflation stood at 0.4 percent, the lowest pace of price increases on record.

Inflation data for October will be released on Thursday.

Local banks expect inflation to pick up slightly to 0.5 percent, while BSP has a projected range of 0.1 to 0.9 percent.

Tetangco recognized that low inflation may indicate room to ease policy rates, but said BSP officials already had their eyes focused much further down the road.

The BSP’s mandate is to protect consumers’ purchasing power by keeping prices stable.

Interest rate hikes tend to restrict consumer demand and keep prices down at the expense of stunting economic growth, while rate cuts spur demand at the risk of over inflating prices.

Meanwhile, Standard Chartered’s Ng said economic growth conditions in the country remained strong, reducing the need for additional stimulus from the central bank.

Gross domestic product (GDP) growth was resilient at 5.3 percent in the first half of 2015, Ng said. “We expect it to improve to 6 percent in the second half,” he said.