BSP seen keeping key rates steady

DBS Bank Ltd., the largest bank in Southeast Asia, sees the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board keeping interest rates steady at next week’s policy meeting.

“Expect no change from the BSP. Yes, inflation is below target, but some upward pressure persists amid unpredictable food prices. More importantly though, whether or not the economy needs a rate cut by the BSP remains questionable at this juncture,” DBS Bank economist Gundy Cahyadi said Friday.

As of April, inflation—the rate of increase in prices of basic goods and services—averaged 1.1 percent, below the government’s 2-4 percent target range for the year.

“That the BSP has been fairly tolerant of a weaker peso suggests that bulk of the policy easing will continue to be done on the currency front,” Cahyadi said. The peso has been weakening amid market jitters ahead of the elections on Monday.

“In any case, fiscal spending is expected to rise in the second half of 2016, under the new [administration]. All the presidential candidates seem to be rather populist in their economic agenda and clearly pro-growth in the near-term. This allows the BSP to remain focused on longer-term financial stability and growth sustainability,” Cahyadi said.

Separately, think tank Oxford Economics sees the Philippines’ monetary authorities holding off from any adjustment in key policy rates this year.

While Oxford Economics has a neutral outlook for Philippine monetary policy in 2016, lead Asia economist Priyanka Kishore said in a recent report that “an analysis of real interest rates and the Taylor Rule suggest that a more expansionary monetary policy could be justified in Japan, Thailand, Philippines, Singapore and India.”

Taylor rule refers to a monetary policy tenet that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output or other economic conditions.

“Low inflation levels imply that real policy rates are much higher relative to the range experienced over the last decade than their nominal counterparts. This is especially true for Philippines, Thailand and Singapore where real interest rates calculated using current (first quarter of 2016) consumer price index inflation are close to ten-year highs, even though the nominal ones are at 10-year lows. However, this does not necessarily mean that monetary policy is particularly restrictive in these countries,” Kishore said.

In February, the BSP cut its 2016 inflation forecast to 2.2 percent from 2.4 percent previously as downward pressures outweighed upside risks.

Inflation settled at an average of 1.4 percent in 2015, the lowest annual rate in almost two decades.

Oxford Economics deemed that “in many Asian countries the constraints on monetary policy are real and we do not see the scope for substantial rate cuts.”

But in the case of the Philippines, “although its negative inflation gap suggests a low Taylor Rule interest rate, robust domestic growth momentum means there is little need for rate cuts in our view,” Kishore said. Ben O. de Vera