Steady policy rates seen

The Bangko Sentral ng Pilipinas is unlikely to tweak monetary policy this year as the country’s economic growth remains strong while a low-inflation regime has been maintained despite volatile weather and a surge in government infrastructure spending, according to British banking giant HSBC.

But the BSP would likely continue increasing the volume of the term deposit facility in the coming months while a reduction in the reserve requirement ratio might be possible next year, HSBC said in a Sept. 19 research note written by economists Joseph Incalcaterra and Maitreyi Das.

“In an environment of uncertainty surrounding monetary policy, particularly in Asia, the BSP stands out as a bastion of stability,” the HSBC note said, adding that existing policy settings might be kept unchanged on Thursday when the BSP’s policymaking Monetary Board meets just hours after the Federal Open Market Committee was expected to release its decision on monetary policy. The consensus view is that the US Fed will not increase interest rates in this meeting.

While there have been significant outflows from the equity market over the past month—weakening the peso in the process —HSBC said most of the excess liquidity in the financial market was from the domestic banking sector. Moreover, the Philippine peso is seen trading within the central bank’s comfort range. “As such, there is no need for a response from monetary policy,” the HSBC report said.

HSBC said the Philippine economic growth outlook for 2016 remained on track to outperform. Following the 6.9-percent year-on-year growth in first-semester gross domestic product, the bank said these numbers should moderate in the second half due to base effects and the dissipation of the election-spending impact on growth.

“Yet the expansionary 2017 budget, which is currently being deliberated by Congress, suggests that growth should remain strong next year, thanks to a sustained increase in investment,” the economists said.

Since adopting an interest rate corridor (IRC) in June, the BSP has kept rates on hold at highly accommodative levels, the research noted. After cutting the policy rate by 100 basis points, the HSBC report noted that focus had been on increasing rates in the term deposit facility in order to bring market rates closer to the policy rate and make the main policy rate (overnight borrowing rate) more effective.

But despite increasing the volume of the weekly auctions from P30 billion in June to P90 billion in September, HSBC noted that the volumes were still too small and the auctions oversubscribed. As such, the seven- and 28-day tenor term deposit rates were only marginally higher than the overnight deposit facility which has no restriction on volume.