The Bangko Sentral ng Pilipinas will likely hold its key policy rates steady for the rest of the year after bringing them down to record lows on Thursday.
This was according to British banking giant HSBC, which said in its latest commentary on the Philippines that, with the policy rates brought down to historic lows of 4 and 6 percent for the overnight borrowing and lending facilities, the current interest rate environment was sufficient to help boost economic growth.
Bringing the rates down further, the multinational services firm said, might already cause inflation-related problems in the months ahead, especially given oil price-related developments offshore.
With the rate reduction done so far this year, “(The BSP) did what it could to jump-start domestic spending. For the remainder of the year, inflationary concerns from ample liquidity and high oil prices will motivate it (interest rate-setting) to stay put,” HSBC said.
The European Union has decided to ban starting July 1 oil imports from Iran, a major oil supplier, to pressure the latter to give up its nuclear program. Observers are concerned the standoff between the EU and Iran may eventually cause oil-price spike in the coming months.
“As a net importer of oil, the Philippines face the risk of importing inflation. Recently, oil prices rose domestically. Although the rise in prices is unlikely to push up headline inflation immediately, they may trigger second-round (consumer price index) effects,” HSBC said.
Amid the ongoing oil tension, Dubai crude has risen to about $120 a barrel in the last few days. The government had assumed oil price will settle within an average of $90 and $110 a barrel this year.
Low interest rates boost demand for loans, which in turn prop up consumption, investments and, eventually, overall economic growth. However, the higher demand created by lower interest rates has the tendency to cause higher inflation, as well.
The BSP said the interest rate cut done on Thursday was deemed prudent by its Monetary Board, which believes the resulting rates, although they may accelerate inflation, would not push increase in consumer prices beyond target levels.
The BSP cut its key policy rates by another 25 basis points last Thursday. The move followed a similar 25-basis-point cut done in January.
The government aims to keep inflation within a full-year average of 3 and 5 percent.
In January, inflation settled at 3.9 percent.
Meantime, the government aims to accelerate growth of the economy this year to a range of 5 to 6 percent to reverse last year’s slowdown.