BSP seen holding off rate hike

MANILA, Philippines—(UPDATE)The-tamer-than-expected May inflation rate may give the Bangko Sentral ng Pilipinas leeway to pause its monetary tightening cycle during its next policy rate setting meeting next week, according to economists.

The BSP is likely to leave its overnight borrowing rate at 4.5 percent at the Monetary Board’s June 16 meeting after the inflation rate for May was reported at 4.5 percent, which was better than market expectations of an above-5-percent rate of increase in consumer prices during the period, economists from Citigroup, HSBC and Bank of the Philippine Islands said.

“This accelerates our view that fiscal underspending and subdued oil or commodity price outlook would drive the rate pause event in the third quarter of 2011,” Citi economist Jun Trinidad said in a research note.

International crude oil prices have stayed at elevated levels over the last five months, but local inflation has yet to breach the 5 percent mark—the high end of BSP’s target range, Trinidad noted.

“While ‘statistically’ this upside potential could still happen on the back of higher core inflation, the time it is taking suggests the pace of inflation may not be as fast as initially expected leading to a peak within the 5 percent range rather than the 6 percent range,” he said.

The BSP will likely pause during its policy meeting next week and resume tightening with a 25 basis point rate hike in July, HSBC economist Sherman Chan said in a separate research note.

Despite a pickup in energy prices, inflation in May had come in far below expectations, thanks to well-contained food prices, Chan said.

“With global economic data becoming more uncertain, however, the BSP can afford to sit back in June before stepping up again in July,” she stressed.

Bank of the Philippine Islands economist and head of research Emilio Neri Jr. agreed that the lower-than-expected May inflation rate had increased the probability that the BSP would pause this month after twice hiking key interest rates by a total of 50 basis points.

“Even if they decide to hike on the 16th [of June], the main inflation figure signaled that the BSP is already winding down on its tightening cycle,” Neri said in an interview.

For the five-month period, the country’s inflation rate averaged 4.2 percent, which is well within the BSP’s 3-5 percent goal.

BPI sees the country’s inflation rate averaging 4.9 percent for the whole year, which is likewise within the BSP’s target range.

Neri said the BSP may sanction one more quarter-percentage-point interest rate hike by July or September.

“We’re hoping the [softening of] global oil prices will also give the BSP the scope to pause,” he said.

HSBC sees at least three more rate hikes being delivered over the second half, taking the BSP’s overnight borrowing rate to 5.25 percent by yearend from 4.5 percent.

Chan is expecting Philippine inflation rate to temporarily breach the BSP’s target band, resulting in a higher average for the full year. But HSBC lowered the 2011 inflation average forecast for the Philippines from 5.4 percent to 5 percent, right within the upper band of the BSP’s target range.

“Assuming that energy and soft commodity prices remain well-behaved during the second half of this year, headline inflation may ease further into next year, possibly averaging 4.5 percent for 2012,” Chan said.

Citi’s Trinidad said a potential rate pause next week need not imply an outright shift to a neutral rate stance.

“A positive output gap of 1 percent in the second quarter of 2011, in line with manufacturing utilization rate exceeding 80 percent, depicts factors conducive to upside inflation risk. With a 50-basis point hike in place and less urgency to elevate the policy rate, policymakers have the luxury to pause and assess the need for further adjustments,” she said.

Output gap refers to the difference between the actual output of an economy and the output it could achieve when it is most efficient, or at full capacity. A positive output gap occurs when actual output is more than the full-capacity output.