MANILA, Philippines—The Philippines is the only country in developing Asia where the central bank has yet to start raising policy rates.
Monetary authorities across the globe brought down policy rates to record lows in 2009 in response to the recent global economic crash, but neighboring central banks have begun reversing the series of rate reductions amid the global economic recovery and sharp growth rates in 2010.
The reversal is anchored on the economic fact that keeping interest rates too low for too long could eventually lead to a surge in prices of goods and services. Economists explain that low interest rates encourage businesses and individuals to borrow, therefore causing demand and prices to rise.
The Bangko Sentral ng Pilipinas, however, said what to do with policy rates depends partly on domestic developments. For the BSP, just because others have raised rates doesn’t mean it has to do the same.
In the BSP’s latest policy rate-setting meeting, which happens every six weeks, the Monetary Board once again shrugged off moves by neighboring central banks and decided to keep its own policy rates at historically low levels.
The BSP’s overnight borrowing and lending rates, which influence commercial interest rates, therefore remain at 4 and 6 percent, respectively. The rates have stayed the same since July 2009.
BSP Governor Amando Tetangco Jr. said in a recent briefing that, so far, the inflation outlook in the country remains favorable. The BSP estimates that inflation will likely average at 4.4 percent this year and 3.5 percent next year.
These projections are well within the government’s inflation target of between 3 and 5 percent.
Therefore, Tetangco said, the BSP still had room to help sustain a robust economic growth through historically low interest rates.
The BSP chief, nonetheless, said the BSP was keenly monitoring all factors that could affect inflation in the Philippines and would not hesitate to act should currently favorable indicators change.
Tetangco and his colleagues in the BSP said that while demand for goods and services in the country was rising, supply was growing just as fast, thereby tempering upward pressures on prices.
However, despite the pronouncements by the BSP of a still favorable inflation outlook, there is a consensus among banking experts that the monetary authority will soon have to give in and start raising policy rates.
Global oil and food prices are rising, while growing domestic incomes are further putting price pressures, they noted. Industry players have different opinions, however, on how soon the BSP will start raising rates and by how much.
Standard Chartered
According to Nicholas Kwan, the bank’s head of research for Asia, the BSP is likely to raise rates this month, and will continue raising rates until the increase reaches 150 basis points by the end of the year.
“To hold [key policy rates] longer will make the BSP behind the curve,” Kwan said.
HSBC
Frederic Neumann, managing director and co-head of Asian Economic Research-HSBC Global Research, said he expects the BSP to start with a 25-basis-point hike in May followed by another 25-bps increase in the latter part of the year, putting the total projected increase for the year at 50 bps.
But while he sees the BSP starting to raise rates only in May, he suggested that doing the rate hike in March would be more prudent. Given that the Philippines imports some of its food and the bulk of its oil requirements, global price movements will eventually cause sharp increases in domestic prices if interest rates would not rise.
“Historically, Philippine inflation responds to global food prices,” Neumann said.
Goldman Sachs
In a research note written by its analysts Shiria Sum and Enoch Fung, the investment bank said the BSP will likely raise rates by a total of 50 basis points for 2011, and the hikes for the year will be done in the second half.
The bank added, however, that the BSP will likely be more aggressive next year, and raise rates by another 100 basis points.
“We continue to expect higher global commodity prices and the close of the output gap to intensify the upward pressure on inflation,” it said.
Credit Suisse
The bank expects a 25-basis-point rate hike in March to be followed by another 25-bps increase before the year ends. It said the BSP may implement a rate hike of 50 basis points to help curb the buildup of inflationary pressures.
“BSP is getting closer to raising rates; now a hike [this] month can’t entirely be ruled out,” Devika Mehndiratta, the bank’s vice president for emerging markets economic research, was recently quoted as saying.
“In an attempt to ensure that inflation worries don’t get embedded in market psyche, the BSP could toy with the idea of doing a token hike sooner rather than later [even if it may decide to thereafter pause to ‘wait and watch’],” he added.
Merrill Lynch
The bank sees a rate hike this year of 50 basis points in the first half of the year.
Its foreign exchange strategist, Ashok Bhundia, said that the BSP will soon have to raise rates, but only at a tempered pace as it wants to continue supporting growth, like any other Asian central bank wants to do.
“Monetary conditions will be gradually tightened—but not too aggressively because the region’s policymakers are trying to support growth,” he said.
Credit Agricole
The bank sees the BSP raising rates in June by 25 basis points followed by another 25-bps increase in the second half, putting the projected total hike for the year at 50 bps.
The bank said in a recently published research note, titled “Ball in Asia’s Court,” that the BSP will soon join other central banks in the region in raising rates, and that the rate hike in the Philippines will help prop up the peso.
“The Philippine peso is one of our top picks in the region for 2011 as the current account surplus [the excess of dollar inflows—mainly from export income and remittances—over outflows caused by imports and payments] is likely to remain large while valuations in the equity market are likely to continue attracting foreign portfolios,” it said.
Citigroup
The bank sees a modest increase for the whole year and the first adjustment to be implemented in the second quarter.
“We expect the Monetary Board [of the BSP] to adjust overnight rates perhaps starting the second quarter of 2011. With or without fiscal stimulus, straight quarters of favorable growth since the first quarter of 2010 would be a compelling argument for rates normalization,” Citigroup said in a report.
First Metro Investments Corp.
FMIC sees a modest 25-basis-point hike in the second half, taking into account the usual conservative stance of the BSP in moving its key policy rates.
“The BSP will still be on hold, but we expect rates to rise in the second half,” said FMIC executive vice president Juanchito Dispo.
UBS
In a research note titled “Asean: Inflation Scenarios,” analyst Edward Teather said the BSP will likely implement a series of interest rate hikes for a total of 100 basis points for the year. He said rate increases are necessary given rising inflationary concerns this year.
Capital Economics Ltd.
The London-based think tank said the BSP will start raising rates as soon as March and continue doing so until the rate hike totals 100 basis points by the end of the year.
“We are sticking with our long-held view that rates need to move up this year to ensure that inflation pressures remain contained,” said analyst Ashira Perera in a research note, titled “Rate Hikes in the Philippines Only a Matter of Time.”