Big banks bet BSP will hike rates

Against the backdrop of strong domestic economic growth and rising consumer price pressures, the inflation-targeting Bangko Sentral ng Pilipinas is seen to turn hawkish or biased for monetary tightening by next year.

At least three financial institutions—Citigroup, Bank of the Philippine Islands and Nomura—have projected interest rate increases by the BSP ranging from a low of 25 basis points to as much as half a percentage point next year.

On the other hand, two financial institutions—HSBC and Barclays—do not see the BSP turning hawkish anytime soon. Instead, HSBC even called for a 1-percentage point reduction in the reserve requirement on banks within the first half of 2017.

Both BPI and Citigroup expected a 25-basis-point rate increase next year. BPI expected the rate adjustment to come by mid-2017 while Citi expected one rate increase by the fourth quarter of next year.

“When inflation next year starts exhibiting a trend toward a persistent breach of the 4-percent inflation target, BSP is likely to hike. We see this taking place near mid-2017. We only see one hike for now,” BPI economist Emilio Neri Jr. said on Friday.

Citi Philippines economist Jun Trinidad said in a research note on Friday that the BSP had the “luxury of time in deciding when to tighten its policy rate stance in view of upside risk to the inflation outlook.”

“Meanwhile, in the near term, it can sustain prevailing low interest rates to mitigate downside risk to the growth outlook,” he said.

Last week, it was reported that the country’s gross domestic product (GDP) had expanded by 7.1 percent year-on-year in the third quarter, beating all expectations. This brought nine-month average GDP growth to 7 percent, making the Philippines the fastest-growing economy in the region.

On its policy rate-setting meeting last Nov. 10, the BSP kept its overnight borrowing rate or reverse repurchase (RRP) facility at 3 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady along with the reserve requirement ratios. While the BSP sees the country’s inflation rate settling slightly below the lower edge of the 2- to 4-percent target range in 2016, it is projected to rise toward the mid-point of the target range in 2017 and 2018 owing largely to the pending petitions for adjustments in electricity rates along with the proposed tax policy reform program.

Citi expects Philippine inflation probing 3 percent by the late first quarter 2017 and settling in the BSP’s mid-point
3-percent target in the second half of 2017. Accelerating the rate tightening event is the risk to Citi’s base case rate increase of 25 basis points in the fourth quarter of next year.

For its part, Nomura said in a Nov. 17 research note that the country’s solid growth outlook and rising inflation could prompt the BSP to raise rates by a cumulative 50 basis points in the first half of next year.

Barclays, on the other hand, said in a research note last week that there would likely be no change in the BSP’s stance for some time.

“Furthermore, we believe that a rate hike would only be likely if growth remained elevated around current levels with inflation moving high enough to justify an increase in rates. Although there are rising uncertainties at a global level, we think the Philippines’ strong external position and low level of short-term debt provide the BSP with enough policy space to maintain an accommodative stance,” it said.

British banking giant HSBC said that despite upside risks to inflation, the BSP would have scope to keep rates on hold through 2017, but noted that term deposit rates were rising.

“While the BSP should consider numerous global and domestic variables, the relative stability of the Philippine economy amid tepid inflation—despite some upside risks stemming from FX (foreign exchange) and utility tax hikes—reduces the need to change policy for now, but larger term deposit auction volumes are already resulting in incremental tightening,” HSBC economist Joseph Incalcaterra said in a research note on Nov. 17.

HSBC said it believed that a 100-basis point cut in the reserve requirement ratio (RRR) for banks would be likely over the next six months, but this should have a negligible impact on overall bank lending given still low loan-to-deposit ratios.

Based on our anecdotal discussions with banks’ management, the country’s largest banks are unlikely to increase lending on the back of a RRR cut, but it would improve internal liquidity management. Moreover, it would facilitate the lending operations of foreign banks ramping up operations in the Philippines. This would provide a fillip for the policy objective of increasing banking coverage ratios,” he said.

The HSBC economist said there had been some incremental tightening in the financial system despite rates staying on hold.